Kotak Media 20181022

ATTRACTIVE
Media
India OCTOBER 11, 2018
THEME
BSE-30: 34,761
OTT: New dawn rising. We expect explosive growth in digital video consumption over
the next five years, led by a fast-evolving ecosystem, consumption trends and massive
investments by global and local players. Competition is more intense than anticipated
and platform-plays are putting pure-plays at some disadvantage. Local broadcasters’
cost of doing business is likely to rise and maintaining a fair share in the OTT market
would be difficult given the stiffly competitive landscape. These trends and concerns
underpin our sharp cut in target PE multiples for broadcasting stocks - we downgrade
Zee to REDUCE (TP `430 from `600) and maintain REDUCE on Sun (TP `660 from `925).
OTT: trends gather pace; expect screen convergence and TV-to-OTT shift in ad spends in 4 years
We expect 52% CAGR in OTT (over-the-top) consumption over the next five years, propelled by
a fast-evolving ecosystem and consumption trends, and massive investments by global and local
players. OTT is likely to contribute 25% to overall video (TV + OTT) consumption in FY2023E (9%
at present). Unlike developed markets, a bulk of the OTT consumption in India would be driven
by advertising-led platforms resulting in an abundant supply of OTT ad inventory that would
compete with TV. We expect overall video advertising to gain share from print and non-video
digital mediums. However, within video advertising, TV is likely to begin losing share to OTT in
3-4 years. The OTT subscription opportunity is limited for now, given the low willingness and
ability of Indian consumers to pay for content. We see negligible risk to Pay-TV subscription.
Competition intense: Indian OTT’s ‘e-com’ moment
The enthusiasm of global companies for Indian OTT is overwhelming; we would venture that it
may be disproportionate relative to the market opportunity. Global players/platform-plays
(Netflix, Amazon Prime, Jio and Youtube) can take the long-term view and outspend others. It is
difficult to call out winners, but we note the three key attributes for success in OTT: (1) content
capability, (2) technology, and (3) capital. Global players/platform-plays are strong in at least
two of these areas. We see two challenges for OTT pure-play platforms of local broadcasters
such as Zee: (1) increase in cost of doing business, and (2) difficultly in maintaining its fair share
in the more-competitive and fragmented OTT market. Given this backdrop, we believe local
broadcasters such a ZEE5 would be better positioned with a Hulu-like collaborative approach or
a JV partner with complementary strengths.
Zee: Odds mount. Downgrade to REDUCE and cut TP to `430
Zee’s execution in the TV broadcasting business continues to be flawless but the intensity and
quality of competition pose challenges for ZEE5. Zee’s fortunes are not only dependent on
ZEE5’s execution but also on the strategy and execution of its ferocious competition (external
factors). In our view, Zee may have to either increase its capital outlay for ZEE5 and/or adopt a
collaborative approach (JV partnership) to better tackle external risks. We cut PE multiple to
capture the medium-term risk to TV business and uncertainties in OTT. We value Zee at 21X
Sep-20E EPS (19X for core + 2X for optionality of ZEE5; 28X earlier); TP revised to `430 (`600).
Sun: Priorities not cognizant of changing landscape. Stay cautious, cut TP to `660
Sun’s underinvestment in OTT and viewership share loss in Tamil GEC could sustain its Jaykumar Doshi
jaykumar.doshi@kotak.com
underperformance. We believe Sun needs to step up investment in digital and prioritize it over Mumbai: +91-22-4336-0882
regional expansion, if necessary. Penetration of TV and internet in South is higher than rest of
India; potentially, this implies lower TV-penetration led opportunity and faster adoption of OTT.
We cut FY2012-21E EPS by 4% and target PE multiple to 17X Sep-20 EPS (from 24X).
Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
India Media
OTT: Executive Summary of FAQs

In the following pages we have examined five FAQs on OTT at length. Here is a quick view.
#1: Size of OTT opportunity: US$3.1 bn by FY2023E at a CAGR of 48% on low base
We estimate over-the-top (OTT) revenue will increase to US$3.1 bn at a CAGR of 48% over
FY2018-23E, driven by (1) digital video advertising ballooning to US$2.2 bn at a 43% CAGR
and (2) OTT subscription increasing to US$0.9 bn at a 67% CAGR. We expect online video
consumption (watch time) to grow at 52% CAGR and contribute 25% to total video
(TV+digital) consumption in FY2023E from the present 9%. We expect the share of video in
total ad spends to increase to 51% from 46%; TV’s share will likely drop 300 bps to 39%
whereas digital video would gain 800 bps to 12% of total ad spends. (Exhibit 13)
Our underlying assumptions are: (1) about 500-550 mn daily active users (DAUs) with
average time spent (ATS) of 100 mins/day in FY2023E versus 200-225 mn users spending
60-70 mins/day at present. To put this in perspective, TV has 614 mn daily tune-ins and ATS
of 228 mins/day at present, (2) the launch of a third-party digital viewership measurement
product (BARC’s Ekam) by the end of CY2019, and (3) Jio-led proliferation of the high-
speed fixed-line broadband in the top 70-80 cities within 2-3 years.
#2: Risk to TV: Not in the next 3-4 years, likely thereafter
We expect India’s OTT video services market to largely grow through advertising video on
demand (AVOD) rather than subscription video on demand (SVOD), the primary mode of
digital video consumption in most developed markets. Abundant supply of OTT video ad
inventory would pose some risk to TV ad spends 3-4 years out. TV advertising as yet beats
digital advertising in several ways (1) reach: TV offers a reach of 836 mn viewers versus 250
mn monthly active users (MAUs) of OTT platforms, (2) lack of third-party viewership
measurement for digital video, (3) perception of ad impact being bigger on larger screens
(TV) than on mobile, (4) pricing: TV is more efficient on cost-per-thousand views. These
concerns around digital advertising would be resolved in the next 2-3 years, paving the way
for some shift in ad spends to OTT from TV. We see little risk to Pay-TV subscription revenue
growth in the foreseeable future given the under-penetration of TV and lack of price
arbitrage between cable TV bundles and SVOD services.
We expect the convergence of screens from a consumer and advertiser standpoint. We do

not aver that TV will stop growing or decline in the near future.
#3: OTT winners: Platform-plays have the edge, but too early to call
It is difficult to call out winners or to predict if it will be a ‘winner-takes-most’ market. Three

key attributes for success in OTT are (1) content capability, (2) technology/product, and
(3) capital. Jio, Hotstar, Amazon Prime, Netflix, YouTube and Facebook are strong in at least
two of these three areas. Further, Jio, Amazon and Netflix have an edge in terms of their
global viewer base and/or other businesses (platform-play) that allow them to outspend
others. YouTube and Facebook have scale (180-200 mn DAUs) and solid engagement driven
by their evolved recommendation engines and monetization strength. Hotstar has made a
mark thanks to sports content and its impressive handling of huge live-streaming traffic.
ZEE5 scores well on the first attribute but scores low on the second and third relative to the
competition. Its success depends not only on its own execution (internal factors) but also on
the strategy/execution of its competition, especially, Jio and Hotstar (external factors).
We believe ZEE5 would be better placed to tackle external risks (such as a prolonged phase
of irrational competition) if it strengthens the second and third attributes through JV
partnerships with companies having complementary strengths (the obvious names that
come to mind are Flipkart, Hotstar, Airtel, Chinese internet players, AT&T-TWC).
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Media India
#4: Impact on profitability
A tricky question. OTT business economics are yet to stabilize, even in mature markets. Our
broad thoughts on Indian OTT industry economics: (1) content production cost is 30-50%
higher than TV as fixed cost is apportioned over short 8-10 episode series in OTT as against
300+ episodes in case of TV, (2) the ad rate is better on a per-eyeball basis but absolute
numbers are small due to a lack of scale, (3) subscription potential is much lower than TV at
present. Medium-term profitability will be a function of the number of players in the market.
Network benefits will likely be more acute in the digital ecosystem than TV.
#5: Valuation: Historical multiples do not matter as rules of the game are being
redefined
Zee and Sun have long-enjoyed premium valuation multiples thanks to several factors:
(1) broadcasters captured a bulk of the value in the media value chain, (2) longevity of the
growth opportunity (proxy to consumption), and (3) digitization-led structural improvements
in Pay-TV. A 30X P/E multiple implied 13-14% revenue CAGR over 15 years at stable
profitability and cash generation (WACC of 11-11.5% and terminal growth rate of 5.5-6%).
Historical valuations do not matter anymore as the rules of the game are being redefined.
Given this, we lower our target PE multiple for Zee and Sun to 19X and 16X (from 28X and
24X). We ascribe an additional 2X and 1X PE multiple to factor in the optionality of ZEE5
and Sun NXT. Our revised TP for Zee is `430 (`600 earlier) and Sun is `660 (`925 earlier).
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

India Media
Exhibit 1: Snapshot of Indian TV and digital ecosystem, March fiscal year-ends, 2018-23E
FY2018 FY2023E
Demographics
Population: 1.3 bn Population: 1.37 bn
Households (HHs): 298 mn Households (HHs): 329 mn
Urban HHs: 110 mn Urban HHs: 135 mn
Rural HHs: 188 mn Rural HHs: 194 mn
Ecosystem
Internet users: 494 mn Internet users: 887 mn
Internet penetration: 38% Internet penetration: 65%
Smartphone users: 291 mn Smartphone users: 678 mn
Smartphone users: 23% Smartphone penetration: 50%
Unique 3G/4G subs: 315 mn Unique 3G/4G subs: 698 mn
3G/4G penetration: 24% 3G/4G penetration: 51%
Wireline subs: 21.1 mn Wireline subs: 48 mn
Linear TV
TV households: 197 mn
CAGR:
TV penetration: 66% TV consumption: TV households: 234 mn
3%
TV penetration: 71%
TV reach: 836 mn
TV reach: 935 mn
TV daily tune-ins: 614 mn
TV daily tune-ins: 677 mn
Avg. time spent: 228 mins
Avg. time spent: 236 mins
TV watch time: 140 bn mins/day
Key players: Zee, Star, TV18, TV watch time: 160 bn mins/day

Sony and Sun
OTT
CAGR:
OTT consumption:
MAUs: 250 mn MAUs: 600-650
52%
DAUs: 180-200 mn DAUs: 500-550
Avg time spent: 60-70 mins/day Avg time spent: 60-70 mins/day
Total watch time: 7 bn mins/day Total watch time: 53 bn mins/day
Monetization
CAGR:
TV ad revenue: US$4 bn TV ad revenue: US$ 6.9 bn
TV ad rev: 11%
TV's share in ad spends: 42% Pay-TV rev: 9% TV's share in ad spends: 39%
Pay-TV subscription : US$4.9 bn Pay-TV subscription: US$7.5
O TT ad revenue: US$0.4 bn O TT ad revenue: US$2.2 bn
O TT's share in ad spends: 4% O TT's share in ad spends: 13%

CAGR:
OTT subscription: US$0.1 bn OTT ad rev: 43% OTT subscription: US$0.9 bn
OTT sub rev: 67%
Source: BARC, Kotak Institutional Equities

Media India
#1: Size of OTT opportunity: US$3.1 bn by FY2023E at a CAGR of 48% on low

base
We expect OTT revenues to increase to US$3.1 bn at a CAGR of 48% over FY2018-23E
driven by (1) 43% CAGR in online (digital) video advertising to US$2.2 bn and (2) 67%
CAGR in OTT subscription revenue to US$0.9 bn (B2C subscriptions excluding B2B OTT-
Telco deals). Key assumptions and arguments are detailed below.
Exhibit 2: We estimate 48% CAGR in OTT revenues to US$3.1 bn over FY2018-23E

OTT advertising and subscription revenues forecast, March fiscal-year ends (US$ bn)
Digital video ad spends (US$ bn) Digital video subscription revenue (net of GST) (US$ bn)
12
9 2.7
2.2
6 1.9
1.5
1.2 7.6
3 6.1
0.9 4.9
0.7 3.9
0.5 3.0
0.1 0.2 0.3 2.2
1.2 1.6
0.4 0.6 0.8
0
2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Source: Kotak Institutional Equities estimates
A burgeoning digital ecosystem is revolutionising media consumption trends
The digital ecosystem has come a long way following the launch of Jio. Key data points
(August 2018 over March 2016)—
 Internet users— increased to 525 mn from 350 mn; internet penetration up to 42%
from 27%,
 Smartphone users— up to 350 mn from 215 mn; smartphone penetration at 28% of

population,
 Mobile data costs plunged 95-98% to `3.5/GB and cable broadband costs have fallen
80-85% to `5-7/GB,
 Total video watch time in India has shot up 9-10X to about 14 bn mins per day
(aggregate of top 8-10 OTT platforms including YouTube and Facebook videos),
 YouTube’s monthly active users (MAUs) have doubled to about 240 mn and daily active
users (DAUs) have nearly quadrupled to about 180-200 mn (source: industry interactions).

India Media
Exhibit 3: Internet penetration in India, March fiscal year-ends Exhibit 4: Smartphone penetration in India, Calendar year-ends
Internet users (LHS, mn) Smartphone users (LHS, mn)

57 50
900 Internet penetration (RHS, %) 60 Smartphone penetration (RHS, %)
51 750 50
44
750 45 50 39
763 678
38 600 40
600 674 40 591
33 29
587 450 26 516 30
27 23
450 24 494 30 441
20 20
422 300 16 366 20
300 13 343 20
11 302 291
10 252
252 150 10
150 10 199
165
121 137
0 0 0 0
2018E
2019E
2020E
2021E
2022E
2019E
2020E
2021E
2011
2012
2013
2014
2015
2016
2017
2018
2015
2016
2017
Source: Census of India, TRAI, Kotak Institutional Equities estimates Source: e-marketer, Kotak Institutional Equities estimates
Exhibit 5: India: Mobile data cost down 98% in the past 2 years Exhibit 6: India: Mobile data usage up 11X in the past 2 years
Mobile data cost (Rs/GB) Mobile data usage (bn MB/quarter)

250 4,500 4,228
225
4,000
200 3,500
3,000
150
2,500
2,000
100 1,606
1,500
1,000
50
391
500
3.5
0 0
Apr-16 Sep-18 Sep-16 Sep-17 Jun-18
Source: Kotak Institutional Equities Source: Companies, Kotak Institutional Equities

Media India
Exhibit 7: Digital video watch time up 10-11X in the past 2 years Exhibit 8: YouTube: MAUs have doubled, time spent/user up 4X
Digital video watch time (aggregate) (bn mins per day) 300 Youtube MAUs (mn)
16
14 250
12
2X 200
10
8 150
6
100
5X
4
50
2
0 0
Aug-16 Aug-17 Aug-18 Aug-16 Aug-18
Source: Kotak Institutional Equities Source: Industry interactions, Kotak Institutional Equities
We expect 52% CAGR in digital video consumption over FY2018-23E.
We expect 52% CAGR in digital video consumption over the next five years driven by:
 Digital video penetration. India has about 250 mn digital video MAUs and about 180-
200 mn digital video DAUs at present. These numbers have increased 100% and 200%
respectively, over the past two years. We expect these digital video users to more than
double in five years driven by (1) an increase in unique 3G/4G subscribers to about 700
mn from 315 mn, (2) increase in smartphone users to about 650 mn+ from 350 mn (India
smartphone shipments at 120-130 mn/year), (3) increase in fixed-line broadband
subscribers to about 45 mn from 21 mn (penetration in households to increase to 15%
from 7%). Our base case assumes that Jio will launch fixed-line broadband offerings in
70-80 cities over the next 2-3 years.
 Higher engagement. At present, the average daily time spent per video viewer ranges
from 25-55 mins for key OTT platforms, much lower than TV’s 228 mins/day in India and
the time spent on digital content in developed markets. We expect OTT engagement to
strengthen and time spent on digital platforms to increase to about 100 mins/day in
FY2023E driven by (1) a shift in consumer preferences towards digital media. This will
especially be the case in single-TV households wherein individuals have different content
preferences and (2) a plethora of digital-exclusive original content.
Digital video advertising growth will follow consumption
We expect digital video ad spends to increase to US$2.2 bn at a 43% CAGR over FY2018-
23E. Our base case assumes the launch of BARC’s third-party digital viewership
measurement system by the end of CY2019. Standardized data and metrics from a third
party platform will increase the acceptance of digital video advertising among marketers.

India Media
OTT subscription opportunity may be relatively small in the initial years

There are two types of OTT subscriptions— (1) subscription from direct customers (B2C) and
(2) subscription through telco tie-ups (B2B2C content deals). Here, we assess only the B2C
(direct) subscription opportunity. In our view, B2B2C subscription opportunity may not scale
up beyond a certain limit as we do not expect telcos (Jio in particular) to continue to bear
any meaningful content cost for a long time without seeking a share in ad revenues.
To assess the potential for direct (B2C) subscription revenues from direct customers, it is
important to understand an average Indian viewers’ willingness and ability to pay for
content.
 Willingness to pay for content. We believe that the Indian viewer may not pay OTT
subscription for TV content. Sample this—Hotstar offers Live cricket (especially IPL) as a
premium (paid) service whereas the same content can be watched with a 5-minute lag
for free (AVOD). We gather that a very small percentage (less than 5-10%) of Hotstar’s
viewers subscribe to the premium (paid) service. The rest watch live sports free with a lag
of five mins.
We believe Indian viewers would only pay for original content. At present, most OTT
platforms have limited original content in local languages.
 Ability to pay for content. We use NCCS (New Consumer Classification System) to
better understand the affordability aspect. NCCS classifies households based on two
variables—education of the chief wage earner and the number of consumer durables
owned by the household (Exhibit 9). It captures the affordability quotient of a household.
NCCS A + B strata cover a broad set of households, many of which can potentially afford
to spend `100-200 per month on OTT subscriptions. India has about 100 mn Households
under NCCS A + B—a stretched potential medium-term target segment for OTT
subscription, in our view.
Exhibit 9: New consumer classification system (NCCS)
Education of Chief Wage Earner in a household

Literate but no Some College
No. of formal school/ (incl Diploma)
Durables Illiterate School upto 4 yrs School- 5 to 9 years SSC/ HSC but not Grad Grad/ PG: General Grad/ PG: Professional
Owned 1 2 3 4 5 6 7
0 E3 E2 E2 E2 E2 E1 D2
1 E2 E1 E1 E1 D2 D2 D2
2 E1 E1 D2 D2 D1 D1 D1
3 D2 D2 D1 D1 C2 C2 C2
4 D1 C2 C2 C1 C1 B2 B2
5 C2 C1 C1 B2 B1 B1 B1
6 C1 B2 B2 B1 A3 A3 A3
7 C1 B1 B1 A3 A3 A2 A2
8 B1 A3 A3 A3 A2 A2 A2
9+ B1 A3 A3 A2 A2 A1 A1
Notes:
(1) Pre-defined list of consumer durables: Electricity Connection, Ceiling Fan, Gas Stove, Refrigerator, Two Wheeler, Washing Machine, Colour TV, Computer, Four-wheeler,
Air Conditioner, Agricultural Land (in rural areas).
Source: MRUC, Kotak Institutional Equities

Media India
Exhibit 10: Composition of 298 mn Indian households as per NCCS, July 2018 (mn households , % of
total households)
Urban 1mn+ | NCCS A, Urban 1mn+ | NCCS B,

15 , 5% 12 , 4% Urban 1mn+ | NCCS C,
10 , 4%
Urban 1mn+ | NCCS
D/E, 2 , 1%
Non-TV HHs, 101 ,
34% Urban below 1mn |
NCCS A, 11 , 4%
Urban below 1mn |
NCCS B, 14 , 5%
Urban below 1mn |
NCCS C, 16 , 5%
Urban below 1mn |
NCCS D/E, 7 , 2%
Rural | NCCS A, 15 ,
5%
Rural | NCCS D/E, 22 , Rural | NCCS B, 30 ,

7% 10%
Rural | NCCS C, 42 ,
14%
Paid subscriptions likely to grow to about 67 mn in FY2023E from 16 mn in FY2018
We work with the following assumptions to arrive at our estimate of 67 mn paid B2C OTT
subscriptions by FY2023E (the unique subscriber count would be lower as many would have
multiple subscriptions)—
(1) 4.5% CAGR in NCCS A and NCCS B households to 120 mn over FY2018-23E.
(2) 3.8% CAGR in Urban NCCS C households to 32 mn over FY2018-23E.
(3) Potential SVOD market would be 152 mn households (FY2023E) comprising urban +
rural NCCS A+B (120 mn households) and urban NCCS C (32 mn households). We expect
the rest of the households to be AVOD users or (B2B2C subscribers).
(4) We further break down 152 mn potential SVOD households into 49 mn potential
households for premium SVOD services (monthly ARPU of `100+ net of GST;
Prime/Netflix/Hotstar premium) and remaining 103 mn potential households for basic SVOD
services (monthly ARPU of `35 net of GST; ZEE5, Alt Balaji, and transaction video on
demand TVOD services of Hotstar/Jio).
(5) We model penetration of 53% in premium SVOD potential households and 30% in basic
SVOD. We also assume that there would be no duplication of a subscription within a
household. It is difficult to estimate subscription-sharing (for instance two households
sharing a Netflix subscription; not uncommon in our view); our conservative penetration
numbers factor in that aspect.
Based on the above assumptions, we arrive at 56 mn subscribers and ARPU of `95 in

FY2023E (Exhibit 11). We have also estimated direct B2C subscriptions and subscription
revenues of key OTT players in Exhibit 12.
Besides the above assumptions, we have also applied our understanding of affluent
households based on (1) car ownership—India has about 22 mn unique car households at
present, (2) about 35-40 mn households in India watch at least a movie/year in multiplexes
(at an average ticket price of `175-200/person), and (3) about 13-14 mn active HD
subscribers pay about `100/month for HD content over the SD subscription price.

India Media
We note that India has forever been a ‘low-ARPU’ Pay-TV market and ARPU growth has
lagged inflation for over two decades. Given this, we remain less optimistic about any
material change in paying habits in the near term.
Exhibit 11: Assessing SVOD opportunity for Indian OTT industry based on NCCS data
FY2023E
Potential HHs (mn) Penetration Subscribers ARPU Subscription
FY2018 FY2023E (%) (mn) (Rs/month/sub) (Rs bn) Key assumptions/comments
Premium SVOD subscribers (paying Rs100+/month net of GST)
6 metros | NCCS A+B 14 18 65 12 200 28 We expect Netflix and Amazon Prime to have
the lion's share of this segment followed by
Urban 1mn+ (excl 6 metros) | NCCS A+B 13 17 50 8 150 15
Hotstar (courtesy sports). ZEE5 will have a
Urban below 1mn | NCCS A 11 14 40 6 120 8 small share in this revenue pool.
Total premium SVOD 38 49 53 26 166 51
Basic SVOD subscribers (paying Rs35/month net of GST)
Rural | NCCS A 15 19 45 8 35 4
6 metros | NCCS C 5 7 35 2 35 1 We expect Jio, Hotstar and ZEE5 to have a
Urban 1mn+ (excl 6 metros) | NCCS C 5 6 35 2 35 1 dominant share in this segment. In addition,
we expect TVOD transactions (pay-per-view
Urban below 1mn | NCCS B 14 17 35 6 35 2 for content behind paywall) of a few other
Urban below 1mn | NCCS C 16 19 25 5 35 2 platforms to contribute to this pool.
Rural | NCCS B 30 36 20 7 35 3
Total basic SVOD 85 103 30 31 35 13
Total SVOD 123 152 56 95 64
Total TV subscribers 197 234 234 64
Total Pay-TV 163 196 196 223 526
SVOD as a % of Pay-TV 29 42 12
AVOD subscribers
YouTube and Facebook are strong players

together having 80-85% share in digital
video ad spends of about US$600 mn
(CY2018E). We expect Jio, Hotstar and ZEE5
AVOD OTT MAUs (mn individuals) 250-275 550-600
to participate in this opportunity. We would
not be surprised if Netflix and/or Amazon
Prime also introduce AVOD offerings in India
to capture this huge opportunity.
Source: Company, Kotak Institutional Equities estimates
Exhibit 12: Forecast of OTT subscription (direct subscriptions) revenue opportunity for key OTT players
FY2019E FY2023E
ARPU (gross) Paying (B2C) Subscription ARPU (gross) Paying (B2C) Subscription
Paying direct subscribers (mn) (Rs/sub/month) Subscribers (mn) Rs bn (net) (Rs/sub/month) Subscribers (mn) Rs bn (net)
Netflix 650 0.7 4.3 650 2.7 18
Amazon Prime video (a) 42 12.0 5.1 86 32.0 28
Hotstar 83 0.8 0.6 83 11.0 9
ZEE5 42 0.3 0.1 42 7.0 3
Others (Alt Balaji, Eros Now etc) 42 2.0 0.8 42 14.0 6
Total B2C OTT subscription 58 15.7 11.0 80 66.7 64
Notes:
(a) Amazon Prime subscription includes Prime video, music and Amazon shopping/delivery benefits.
We have allocated 50% of Amazon Prime subscription to Prime video.
(b) Subscriber numbers are not unique subscribers.

Media India
Exhibits 13, 14 and 16 capture our detailed forecast of the OTT industry opportunity
Exhibit 13: Video consumption forecast, March fiscal year-ends, 2018-28E
2018 2019E 2020E 2021E 2022E 2023E 2028E

TV consumption forecast
Population (mn) 1,300 1,314 1,327 1,341 1,355 1,369 1,440
Total households (mn) 298 304 310 316 323 329 363
TV penetration as % of households (%) 66.0 67.0 68.0 69.0 70.0 71.0 76.0
TV households (mn) 197 204 211 218 226 234 276
TV audience per household (indiv iduals) 4.3 4.2 4.2 4.1 4.1 4.0 3.8
Total TV audience (mn indiv iduals) 836 855 875 895 915 935 1,035
Daily tune-ins on TV as % of TV audience (%) 73.4 73.9 74.4 74.4 73.4 72.4 66.7
Av erage daily TV v iew ers (mn indiv iduals) 614 633 651 666 672 677 691
Av erage time spent (mins/day ) 228 233 236 238 238 236 189
Daily TV viewing (bn mins per day) 140 147 154 159 160 160 131
Digital video consumption forecast

Mobile traffic
Number of 3G/4G SIMs (mn) 394 500 600 690 794 873 1,157
Less: adjustment for dual SIMs (@20%) 79 100 120 138 159 175 231
Total number of 3G/4G subscribers 315 400 480 552 635 698 925
3G/4G subscribers as % of population 24 30 36 41 47 51 64
Digital v ideo consumption (mins/day per 3G/4G subscribers) 18 31 39 47 55 63 90

Digital v ideo consumption (bn mins per day ) 6 13 19 26 35 44 83
Wireline traffic
Wireline internet subscribers (mn) 21 23 28 34 40 48 101
Wireline penetration as % of total households (%) 7 8 9 11 13 15 28
Digital v ideo consumption (mins/day per w ireline internet subscribers) 47 70 95 124 155 185 310
Digital v ideo consumption (bn mins per day ) 1 2 3 4 6 9 31
Total digital video consumption (bn mins per day) 7 14 22 30 41 53 114
Total video consumption (bn mins per day) 147 161 175 189 201 213 245
Share of digital in total video consumption (%) 5 9 12 16 20 25 47
Share of TV in total video consumption (%) 95 91 88 84 80 75 53
Growth metrics (yoy %)

Wireless internet subscribers (3G/4G) 27 20 15 15 10 5
Wireline internet subscribers 10 20 20 20 20 10
Digital v ideo consumption 114 51 40 37 29 12
TV v ideo consumption 5 5 3 1 (0) (5)
Total v ideo consumption 10 9 8 7 6 2
Source: BARC, Kotak Institutional Equities estimates

India Media
Exhibit 14: Advertising spends forecast, March fiscal year-ends, 2018-28E
2018 2019E 2020E 2021E 2022E 2023E 2028E

Ad spends forecast (Rs bn)
TV 280 324 372 412 448 481 655
Print (1) 204 213 213 215 217 219 221
Digital (1) 125 164 215 277 351 439 1,056
- Digital v ideo 26 39 57 81 114 156 529
- Digital non-v ideo (search, display etc) 99 125 158 195 237 283 527
OoH 29 33 37 41 46 50 75
Radio 24 28 32 37 41 46 75
Cinema 7 8 9 10 12 14 23
Total 669 770 878 992 1,116 1,250 2,105
Ad spends growth (yoy %)

TV 16.0 14.7 10.7 8.9 7.3 5.2
Print (1) 4.0 0.0 1.0 1.0 1.0 0.0
Digital (1) 31.0 31.0 29.0 27.0 25.0 16.0
- Digital video 50.0 46.0 43.0 40.0 37.0 23.0
- Digital non-v ideo (search, display etc) 26.0 26.3 23.9 21.6 19.2 9.7
OoH 13.0 12.0 11.0 10.5 10.0 7.0
Radio 16.0 15.0 14.0 12.5 12.0 9.0
Cinema 17.0 16.0 15.0 14.0 13.5 10.0
Total 15.0 14.0 13.0 12.5 12.0 10.0
Ad spends market share by mediums (%)

TV 41.8 42.1 42.4 41.5 40.2 38.5 31.1
Print (1) 30.5 27.6 24.2 21.7 19.4 17.5 10.5
Digital (1) 18.7 21.3 24.4 27.9 31.5 35.2 50.2
- Digital video 3.9 5.1 6.5 8.2 10.2 12.5 25.1
- Digital non-v ideo (search, display etc) 14.8 16.2 18.0 19.7 21.3 22.7 25.0
OoH 4.4 4.3 4.2 4.2 4.1 4.0 3.6
Radio 3.6 3.6 3.7 3.7 3.7 3.7 3.6
Cinema 1.0 1.0 1.0 1.1 1.1 1.1 1.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total video advertising

TV + Digital v ideo adv ertising (Rs bn) 306 363 429 493 562 637 1,184
TV + Digital v ideo adv ertising grow th (y oy %) 19 18 15 14 13 12
TV + Digital video share in total ad spends (%) 46 47 49 50 50 51 56
Key metrics
Share of digital in total v ideo consumption (%) 5 9 12 16 20 25 47
Share of TV in total v ideo consumption (%) 95 91 88 84 80 75 53
Brand-safe (BS) digital v ideo in total BS v ideo consumption (%) 3 7 9 13 17 21 41
Share of TV in total BS v ideo consumption (%) 97 93 91 87 83 79 59
Share of digital in total video ad spends (%) 9 11 13 17 20 25 45
Share of TV in total video ad spends (%) 91 89 87 83 80 75 55
Digital v ideo consumption grow th (y oy %) 114 51 40 37 29 12
Digital v ideo ad spends grow th (y oy %) 50 46 43 40 37 23
Key numbers in US$ terms (constant exchange rate of Rs70/US$)

TV ad spends (US$ bn) 4.0 4.6 5.3 5.9 6.4 6.9 9.4
Digital video ad spends (US$ bn) 0.4 0.6 0.8 1.2 1.6 2.2 7.6
Total v ideo ad spends (US$ bn) 4.4 5.2 6.1 7.0 8.0 9.1 16.9
Total ad spends (US$ bn) 9.6 11.0 12.5 14.2 15.9 17.9 30.1

Media India
Exhibit 15: Contribution of Television, print and digital to total ad spends, December year-ends, 2007-17 (%)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Digital
China 5.4 7.1 7.9 10.8 14.8 19.4 25.5 33.1 42.3 51.7 57.8
India 2.5 3.1 3.6 3.9 4.5 5.5 6.5 7.8 9.9 13.1 15.5
Russia 5.0 5.8 9.5 12.3 15.9 18.9 21.9 24.9 34.7 37.4 39.9
UK 21.4 26.0 30.9 32.9 33.6 37.8 40.9 44.5 48.7 52.1 56.4
US 12.7 14.5 17.5 19.1 20.8 22.0 24.2 26.2 28.9 31.3 35.0
Television
China 65.0 62.8 62.8 59.0 56.8 54.0 50.3 45.8 40.6 34.2 29.3
India 37.3 38.4 38.9 40.0 42.0 42.2 43.6 44.6 46.3 45.5 45.6
Russia 44.0 45.8 51.7 50.7 49.7 48.1 47.7 47.0 42.4 41.5 41.0
UK 26.6 26.1 26.3 27.7 27.6 26.5 26.9 26.2 26.0 24.9 22.9
US 40.6 42.2 42.7 44.0 44.2 44.4 43.4 43.6 42.6 42.3 41.0
Print
China 17.7 16.7 16.7 17.1 15.8 13.6 11.7 8.9 5.4 2.9 2.0
India 49.4 47.1 45.6 44.5 42.3 41.1 39.0 37.0 33.8 31.4 29.0
Russia 25.7 24.8 19.1 17.3 15.3 13.8 11.3 9.7 7.3 6.1 4.9
UK 41.6 37.7 32.8 29.6 29.3 25.8 22.9 20.3 16.8 14.4 12.5
US 38.7 36.0 32.4 29.7 27.9 26.5 25.4 23.6 22.0 20.1 17.8
Source: GroupM, Kotak Institutional Equities
Exhibit 16: Subscription revenue forecast, March fiscal year-ends, 2018-28E
2018 2019E 2020E 2021E 2022E 2023E 2028E

Subscription revenue forecast (Rs bn) (net of GST)
Pay-TV subscription revenue forecast (consumer-level net of GST)
Pay-TV subscription revenue (Rs bn) 343 374 408 444 484 526 756
Pay-TV subscribers (mn) 163 170 176 183 190 196 232
Pay-TV ARPU (Rs/sub/month) (net of GST) 175 184 193 203 213 223 272
Pay-TV subscription revenue growth (%) 9 9 9 9 9 7
OTT subscription revenue forecast (consumer-level net of GST)

Digital video subscription revenue (Rs mn) (net of GST) 5 11 24 35 48 64 189
Digital video subscribers (mn) 7 16 28 40 54 67 128
Digital video ARPU (Rs/sub/month) (net of GST) 58 58 72 73 75 80 123
OTT subscription revenue growth (%) 122 121 44 37 33 21
Total video subscription

TV + Digital video subscription (Rs bn) 385 432 479 532 590 945
TV + Digital video advertising growth (yoy %) 12.2 11.0 11.1 10.8 9.9
Digital video share in total subscription revenues (%) 2.9 5.6 7.3 9.0 10.8 20.0
TV share in total subscription revenues (%) 97.1 94.4 92.7 91.0 89.2 80.0
Total video subscription revenue growth (%) 12 11 11 11 10
Key numbers in US$ terms (constant exchange rate of Rs70/US$)

Pay-TV subscription revenue (US$ bn) 4.9 5.3 5.8 6.3 6.9 7.5 10.8
Pay-TV ARPU (US$/sub/month) 2.5 2.6 2.8 2.9 3.0 3.2 3.9
Digital video subscription revenue (net of GST) (US$ bn) 0.1 0.2 0.3 0.5 0.7 0.9 2.7
Digital video ARPU (US$/sub/month) 0.8 0.8 1.0 1.0 1.1 1.1 1.8
Total video subscription revenue (US$ bn) 5.0 5.5 6.2 6.8 7.6 8.4 13.5

India Media
Exhibit 17: China: AVOD-led OTT evolution; SVOD model gained traction with lag
China: OTT advertising and subscription revenues, Calendar year-ends, 2012-22E (RMB bn)
China: OTT subscription revenue (RMB bn) China: OTT ad revenue (RMB bn)
140
125.8
120 114.7
95.6
100
77.1
80 73
67.3
61.2
56.3
60
46.3 44.6
40 32.6 33.3
23.3 23.6
15.2 12.1
20 9.8
6.7 5.2
0.4 0.7 1.4
0
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E
Source: iResearch Report, Kotak Institutional Equities
#2: Risk to TV: Not in the next 3-4 years, likely thereafter
There are two parts to this question— (1) Risk to Pay-TV subscription revenues, and (2) Risk
to TV advertising revenues. We detail our thoughts.
Cord cutting fears are unwarranted; we see negligible risk for a foreseeable future
A key reason for cord cutting in several developed countries is the price arbitrage between
cable TV bundles and SVOD services, and a conducive digital ecosystem (high penetration of
fixed-line broadband and high penetration of smart TVs). The dynamics are completely
opposite in India. For instance (1) SVOD services cost more than Pay-TV bundles, (2) fixed-
line broadband penetration and smart TV penetration is low, and (3) TV subscriber growth
story still has legs in view of 66% TV penetration in total households and about 84% Pay-TV
penetration in TV households. An average Indian family’s size is 4.25 individuals per
household; Pay-TV bundles cater to diverse content preferences of a household at a nominal
price of `250-300/month (about `1/channel).
Exhibit 18: Pricing and ecosystem dynamics in India not conducive for cord cutting
Comparison of factors influencing cord-cutting in India and US, August 2018
US India
Price of cable (Pay-TV) bundle $80 INR 300
Aggregate price of top 3 SVOD services $34 INR 625
Top-3 SVOD services as % of cable (Pay-TV) bundle 43 208
TV penetration in total households (%) 95 66

Multi-TV household penetration (%) 60+ 3
Fixed-line broadband penetration (%) 80 7
CRT TV penetration (%) NA 79
LED/LCD/Plasma/HDTV TV penetration (%) 75+ 21
Connected-TV homes penetration (%) 65+ NA
That said, we do not rule out some cord cutting in multiple TV households as we expect OTT
platforms to replace second/third Pay-TV in a household. Additionally, we note that most of
the TV channels are available on Jio TV live at no cost. If this trend continues, there is a
possibility of cord cutting in a small percentage of households that are light consumers of TV
or extremely price conscious. Overall, we expect TV and Pay-TV penetration-led growth to
continue for the foreseeable future.

Media India
Exhibit 19: India's 66% TV penetration offers ample of headroom for growth
TV households and penetration, March fiscal-year ends
TV households (LHS, mn) TV penetration as % of total households (RHS, %)

250 66 70
64
200 60
54
197
183
150 46 50
143
40
100 40
106
83
50 30
0 20
2004 2008 2013 2016 2018
Source: Company, Kotak Institutional Equities
Screen convergence can trigger shift in advertising to OTT from TV
Unlike US, where digital video consumption is largely SVOD, we expect an AVOD-led
evolution in India. This could imperil TV ad spends 3-4 years out. We expect digital video
advertising in India to follow a higher growth trajectory than in other markets.
Even as digital video advertising is a part of all major ad campaigns nowadays, we highlight
three key concerns of marketers against digital video advertising:
 Digital video scale and reach is inadequate at present. TV offers unparalleled reach
and scale to advertisers. Sample this, (1) India’s TV universe includes 836 mn individuals
of which 614 mn tune-in daily, (2) Hindi GECs reach 315 mn individuals every day, and (2)
Zee TV’s channels reach 75 mn individuals daily. On the other hand, monthly active digital
video users are about 250 mn and daily active digital video users stand at 180-200 mn.
Digital video is far behind TV in terms of overall scale and reach. This gap will narrow with
time making digital more competitive. We note that digital video is not too far behind in
terms of scale and reach in the top 10 cities when compared to a single TV channel.

India Media
Exhibit 20: TV's reach is multiple times that of digital video

Reach of TV and YouTube in terms of mn individuals (Aug 2018)
900 836
750
614
600 535
450
315
300 240
180
150 70
0
TV individuals Avg. daily Hindi GEC- Hindi GEC- Zee TV-daily Youtube Youtube
(mn) tune-ins on TV monthly reach daily reach reach (mn) DAUs (mn) MAUs (mn)
(mn) (mn) (mn)
Source: BARC, Kotak Institutional Equities estimates
 Lack of third party viewership measurement. TV enjoys advertisers’ trust thanks to

BARC’s viewership measurement system. On the other hand, digital video advertising
tends to attract a bit of skepticism due to the lack of a third party measurement system,
different definitions of views across large players (YouTube, Facebook, Hotstar, etc.) and
advertisers do not have a way to find out if and when the ad was telecast. In order to
address this, BARC is in the process of building a digital viewership measurement system
that allows advertisers to compare viewership metrics across digital platforms and also
with TV. BARC’s technical sub-committee for this project has representatives from major
OTT platforms and advertising agencies. We expect this product to be rolled out
sometime in CY2019 and accepted as currency sometime in CY2020. We believe BARC’s
digital measurement insights could swing ad spends to OTT from TV.
 Small-screen (mobile) advertising not as impactful as large-screen (TV) advertising.

At present, the bulk of digital video consumption in India (say 75%+) is on small screens
(mostly mobile phone). The general belief among media planners and advertisers is that
an advertisement aired on TV is far more impactful than one aired on mobile screens
(everything else being constant). As of now, there is no research that confirms or
disproves this hypothesis. In our view, acceptance of and faith in mobile advertising will
increase gradually over time. Further, with increase in wireline broadband penetration
and smart TVs, digital video consumption may shift a bit from small screen to large
screens.
 Pricing. At present, TV is a lot more efficient than digital video on cost per thousand
views and cost per thousand impressions. That said, we do note that this comparison is
not like for like—(1) there is wastage on TV as it does not allow targeting whereas
advertising on digital video is usually targeted, and (2) digital video viewer base perhaps
comprises of individuals better-valued by advertisers (urban, youth and higher proportion
of NCCS A/B). Given surplus inventory on digital video, we expect prices to converge over
time adjusted for viewer quality.
We expect the above four concerns to be largely resolved over the next 3-4 years, paving the
way for acceleration in growth of OTT advertising. As the convergence-of-screens theme
plays out, media planners will no longer treat TV and digital video as different but one and
the same. On convergence, we expect video advertising to gain market share from non-
video advertising (print media and non-video digital) as this highly effective branding
medium also offers sophisticated targeting tools.

Media India
Exhibit 21: Digital video is 2-3X expensive but offers targeted advertising
Cost per thousand views of a 30-second advertisement on TV and digital video (CPM in Rs)
450 Rs350-500 Rs350-500

400
350
300
250
200
Rs130-150
150
100
50
0
Hindi GEC- Prime time slot Youtube / Facebook Hotstar
Source: Kotak Institutional Equities
Analysis of viewership of different TV genres to assess risk of shift to OTT

In our view, TV genres popular among - (1) male viewers, (2) young viewers (say under 40
age group), (3) urban viewers and (4) NCCS A+B viewers, are more vulnerable to the shift in
consumption and ad spends to OTT, in the medium-term. As highlighted in Exhibit 22, we
expect English entertainment, sports, kids and perhaps news genres to be affected first. This
would be followed by Hindi movies and Hindi GEC. We see minimum risk to regional genres
based on their viewership composition and also as we expect the bulk of the investments in
OTT originals to be directed towards Hindi entertainment at least early on.
Exhibit 22: English entertainment, sports, kids and Hindi movie genres are vulnerable to disruption from OTT in the same order
TV viewership mix of key genres by gender, age groups, NCCS classification and urban/rural, July-September 2018
Ad spends Viewership Gender share (%) Age share (%) NCCS share (%) Geo Share (%)
share (%) share (%) Male Female 2-40 40+ A+B CDE Urban Rural
Hindi entertainment- moderate risk of impact from digital
Hindi GEC (Paid) 22 12 47 53 69 31 57 43 68 32
Hindi movies 8 8 54 46 72 28 50 50 64 36
Hindi GEC+movies (FTA) 7 20 51 49 75 25 39 61 28 72
Total Hindi 37 41
Regional entertainment- Low risk of impact from digital

Regional GEC- South 16 27 47 53 63 37 46 54 46 54
Regional movies- South 2 5 51 49 68 33 37 63 37 63
Regional GEC (HSM) 9 10 48 52 61 39 45 55 44 56
Regional movies (HSM) 1 2 50 50 69 31 35 65 36 64
Total regional 27 44
Other genres- High risk of impact from digital

English movies+GEC 5 1 55 45 67 33 58 42 62 38
Sports 10 2 59 41 67 33 56 44 56 44
Youth/Music 3 4 45 55 76 24 42 58 49 51
Kids 4 5 53 47 80 20 50 50 61 39
News 11 3 55 45 61 39 59 41 54 46
Other misc 4 1
Total others 35 15
Total TV 100 100 50 50 68 32 47 53 47 53
Source: BARC data, Kotak Institutional Equities estimates

India Media
#3: OTT winners: Platform-plays have the edge, but too early to call
A snapshot of key OTT landscape
Exhibit 23: List of select OTT (AVOD/SVOD) platforms in India
Platform Youtube Jio Netflix Prime Hotstar ZEE5 Voot Sony Liv Sun NXT Eros Now ALT Balaji
Reliance Sony Pictures EROS Balaji
Owned by Google Netflix Amazon STAR Zee Viacom18
Industries Network International Telefims
Revenue model AVOD AVOD SVOD SVOD AVOD / SVOD AVOD / SVOD AVOD AVOD/ SVOD SVOD SVOD SVOD
Telco tie-ups
Subscription Free Free Rs 500- Rs1,000/year Hostar Premium: Premium Free Rs99/month, Rs49- Rs300/year
800/month Rs129/month Rs1,000/year content: Rs149/3 months, 99/month
Rs199/month Rs500/year Rs499/12 months and Rs470-
Rs49/month 950/year
Content type User generated Aggregator International Movies- Sports- Key cricket Zee's content Movies Select Bollywood Movies and Movies and Original
content model-- Carries content of Bollywood, /sporting events library (movies Viacom18 and Hollywood TV content music across (digital-only
Content of few Live TV feeds (Netflix Originals Hollywood and HBO Originals and shows) fiction and non- movies of Sun Indian or digital free
broadcasters/ and catch-up TV + some licensed regional ABC studios Content of fiction content TV content of Network languages content)
content content of most content) Amazon original Showtime select smaller Kids content Sony and Ten Targets 250
producers broadcasters. Indian films series, select 21st Century Fox broadcasters of almost all Sports hours of
To produce Eros Now and TV shows with foreign soaps and content International big studios original
some original Alt Balaji original content kids programming All Star India content and content content in
content going premium Planning to step Producing a few channels digital original producers first year
forward content up original originals in India Bollywood and series Voot Originals
available to Jio content Hollywood movies
Prime production in Hotstar originals
subscribers India
MAUs (mn) 220-240 40-50 10-15 25-35 75-100 25-35 30-40 20-30 2-5 NA NA
DAUs (mn) 170-190 8-10 4-5 5-7 14-18 3-4 4-6 3-5 0-0.5 NA NA
Our 10-point framework to assess strengths of select OTT players
We use a 10-point framework to assess strengths of key OTT players. Our grading takes into
consideration (1) existing capabilities of players and nuances of the Indian market, and (2)
the ability to build/acquire capabilities that can lend a sustainable competitive advantage.
Further thoughts on the four broad areas
 Content. Content libraries (which include live TV content) lend an edge to broadcaster-
led platforms such as Hotstar and ZEE5. Global players do not have this advantage but
can license some old content from studios (and create movie libraries) for a couple of
hundred million dollars. Content production capability is key for sustainable competitive
advantage. Local players understand the tricks of the trade and preferences of Indian
audience whereas global players have the ability to attract the best talent, adopt best
practices and use data/analytics for content decisions.
 Product and technology. User-friendliness of app (e.g. multi-lingual and voice-based

support) and streaming experience helps early on. We expect this aspect of the product
to become a commodity in the near to medium term. Recommendation engine and
advanced analytics capabilities may offer a sustainable competitive edge in the medium to
long term. It will help improve user engagement, enable programmatic advertising and
take content decisions. Global players have an edge given their engineering prowess.
Local players may have to depend on third-party vendors to some extent. We note that
Hotstar delivered the best-in-class live streaming service during the IPL powered by an in-
house engineering team.
 Capital/platform play. Global players and RJio have deep pockets and/or a global viewer
base and/or other businesses (ecommerce/telecom) that can allow it to economically
outspend standalone OTT players. Big boys have the luxury to invest more, burn more in
pursuit of market share without worrying about cash flows. The street rewards big boys
but penalizes smaller players if they were to take the same approach. Global players and
Jio have a huge advantage on this front over Indian broadcasters.

Media India
 Other aspects. The DNA and culture of an organization and ability to attract talent plays
an important role in its success or failure. Indian players need to consciously work on this
front to be able to compete with global majors. Tie-ups with telcos and traditional PayTV
distributors are important to drive subscriber and consumption growth. These
partnerships are relatively easy to build
Exhibit 24: Our 10-point framework to assess strengths of OTT players
Global players Local players

Netflix Amazon Prime Youtube Facebook RJio Hotstar ZEE5 Sony Liv Sun Nxt
Content
1 Content library a a aa a aaa aaaaa aaaa aa aaa
2 Content production capabilities aaaa aaa aa a aaaa aaaaa aaaaa aaa aa
3 Hook aaa aa aaa aa aa aaaa aa a a
Product and technology
4 User interface and streaming experience aaaaa aaaaa aaaaa aaaaa aaa aaaaa aaa aa aa
5 Recommendation engine aaaaa aaaa aaaaa aaaa a a a a a
6 Data/analytics capabilities aaaaa aaaaa aaaaa aaaaa aa aaa aa aa a
Capital availability / Platform play
7 Capital aaaaa aaaaa aaaaa aaaaa aaaaa aaa aa aa a
8 Platform play (Local/Global) aaa aaaa aa aa aaaaa aa a a a
Others
9 Organization DNA and talent aaaa aaaa aaaa aaaa aaa aaa aa a a
10 Monetization capabilites aaa aaa aaaaa aaaaa aaa aaaa aaaa aa aa
Overall aaaa aaa aaaa aaa aaaa aaaa aa 1/2 a a
Key caveats— In our grading, we are unable capture the intent and focus of OTT players
especially global firms as their India strategy is not publicly disclosed. Our grading could be a
bit subjective based on our own experience as consumers and our industry interactions. Even
though YouTube and Facebook do not have any professional content, we consider them as
important stakeholders in OTT given their penetration, engagement and advertising revenue
base. Finally, while we have graded players based on their on-paper strengths, the eventual
winners will be the ones with razor-sharp focus and determination.
We recall a famous quote of Ted Sarandos (Chief content officer, Netflix) in 2013
“Our goal is to become HBO faster than HBO becomes us” All players have a few
strengths and a few gaps from the Indian market’s perspective. The ones who fill the gaps
sooner stand a better chance.

India Media
Exhibit 25: Key metrics of OTT players in India, Aug 2018
MAUs DAUs Average time spent

(mn) (mn) (mins per user per day)
Youtube 220-240 170-190 50-60
F acebook 200-220 140-160 30-40
Hotstar (a) 75-100 14-18 35-40
J ioTV Liv e 40-50 8-10 25-30
Prime V ideo 25-35 5-7 40-45
Netflix 10-15 4-5 40-45
V oot 30-40 4-6 35-40
Airtel TV 15-20 5-7 25-30
ZEE5 41 NA 31
SONY LIV 20-30 3-5 20-25
J ioCinema 8-15 2-3 25-30
V odafone Play 3-7 0.5-1.5 NA
Sun NXT 2-5 0-0.5 35-40
Notes:
(a) Hotstar's MAUs and DAUs on non-cricket day s. It is 30-50% higher on key cricketing day s (especially IPL).
(b) Abov e metrics includes Android, iOS as w ell as w eb users.
(c) ZEE5's metrics are for Sep 2018 as reported by the company .
Its comparison w ith metrics of other play ers in the table may not be like-for-like.
Source: Industry interactions, , Kotak Institutional Equities estimates
Decoding the competitive landscape and likely strategies of key players
 Netflix and Amazon Prime—Our earlier assessment was that Netflix and Amazon Prime
will cater to the top 5-10% English-speaking viewers, leaving the rest of the market for
local players. However, we believe that both these companies have prioritized India and
are eyeing a bigger pie of the Indian market. We would not be surprised to see significant
investments in Hindi as well as regional content keeping in mind Indian demographics
and diversity.
Strategically, Prime Video has positioned itself as a key destination for Indian language
films. We note that it has 54% share (value terms) in the top-25 Hindi movies released in
the past 12 months. More importantly, all recent buys look like exclusive rights. At a price
point of `1,000/year or `129/month, Prime is a value-offering for movie loving Indian
audiences and especially in view of other bundled offerings such as Prime delivery
(free/express delivery on Amazon.com) and shopping deals. Prime video is also making
significant investments in original content. Overall, we believe Prime video has the
positioning and pricing to become a broad based product in India. It is worth noting that
with about 12 mn prime subscribers, it is a leader in SVOD and has about 70-75% share
of paying OTT subscribers (direct B2C subscribers) in India.
Netflix bought a few movies rights (mostly non-exclusive) in 2017 but seems to be
focusing more on originals this year. We expect it to step up investments in 2019.

Media India
Exhibit 26: Amazon Prime dominates in digital movie rights

Digital rights of top-25 Bollywood movies released during Jun 2017-Jun 2018
NBOC
(Rs mn) Prime Jio ZEE5 Eros now Hotstar Netflix
Bollywood
1 Tubelight 23-J un-17 1,170 a a
2 Mubarakan 26-J ul-17 531 a
3 J ab Harry Met Sejal 04-Aug-17 577 a
4 Toilet-Ek Prem Katha 11-Aug-17 1,350 a a
5 Bareilly Ki Barfi 18-Aug-17 340 a a
6 Baadshaho 01-Sep-17 665 a a
7 Shubh Mangal Saav dhan 01-Sep-17 419 a a a
8 J udw aa 2 29-Sep-17 1,333 a a
9 Secret Superstar 20-Oct-17 596 a
10 Golmaal Again 20-Oct-17 2,045 a a
11 Tumhari Sulu 17-Nov -17 330 a
12 F ukrey Returns 08-Dec-17 746 a
13 Tiger Zinda Hain 22-Dec-17 3,280 a
14 Padmaav at 26-J an-18 2,823 a
15 Padman 09-F eb-18 813 a a
16 Sonu Ke Titu Ki Sw eety 23-F eb-18 1,050 a
17 Hichki 23-F eb-18 425 a
18 Raazi 11-May -18 1,205 a
19 Raid 16-Mar-18 1,019 a
20 Baaghi 2 30-Mar-18 1,582 a
21 Parmanu - The Story Of Pokhran 25-May -18 625 a a
22 October 13-Apr-18 369 a
23 102 Not Out 04-May -18 466 a
24 V eere Di Wedding 01-J un-18 859 a
25 Race 3 15-J un-18 1,676 a
26 Dhadak (1) 20-J ul-18 716 a
Total count 13 6 1 6 9
Share in NBOC (%) 54 9 1 19 17
a Exclusiv e digital rights a Non-exclusiv eExclusiv

digital rights
e digital rights
Notes:
(1) Dhadak co-produced by Zee studios is av ailable exclusiv ely on Prime V ideo. Looks like Zee may hav e opportunistically sold digital rights to Prime V ideo.
These platforms have a few advantages:
1. Global viewer base. We note that the Indian diaspora is about 30-35 mn strong. In
addition, Indian content especially Hindi speaking content appeals to viewers in
several countries in Asia and the Middle East. We note that Zee network has
international reach of 578 mn across 170 countries. In the world of OTT, Netflix and
Amazon Prime are well placed to monetize Indian content in global markets as well.
To put this in perspective— even though the SVOD market opportunity in India for
Netflix and Amazon prime at current price points could be 2-3 mn subscribers and
30-35 mn subscribers, respectively, they may already have a subscriber base overseas
consuming and indirectly paying for select Indian content.

India Media
Exhibit 27: Netflix + Prime Video paying sub is <10% of Zee Exhibit 28: Netflix + Prime Video subscription revenue >=
Pay-TV/SVOD subscribers, CY2018/FY2019 (mn) Viacom
Pay-TV/SVOD subscription revenues, CY2018/FY2019 (Rs mn)
140 20,000
120
16,000
100
12,000
80
60 8,000
40
4,000
20
0
0 Zee Network Sun Network Netflix + Viacom18
Netflix + Prime Zee Network Prime
Source: Industry interactions, Kotak Institutional Equities estimates Source: Industry interactions, Kotak Institutional Equities estimates
2. Subscription revenue stream that can fund a lot of content. As per our
estimates, aggregate subscription revenue of Netflix and Prime video would be in the
range of `9-10 bn in CY2018 (after allocating only 50% of Prime membership fee to
Prime video as the membership also offers delivery/shopping benefits). At a global
level, Netflix’s cash spend on content is about 70-75% of revenues. India being a
priority growth market, Netflix may invest more than this threshold in the initial years.
However, even if we consider that Netflix India invests only 70-75% of its India
revenues in content (in line with global operations), it has `4-5 bn at its disposal for
content. Assuming programming cost of `17.5 mn/hour (almost 4X that of ZEE5),
Netflix can potentially produce about 20 shows (of 10 hours each) annually from
India. In our view, all it may need to build a franchise and an aura is 4-5 marquee
shows.

Media India
Exhibit 29: Netflix cash spend on content is about 75% of revenues
Revenues (LHS, US$ bn)

15 Cash outgo on content (LHS, US$ bn) 90
Cash outgo on content as % of revenues (RHS, %)
78
12 76 76 80
68
9 70
58
6 60
3 50
0 40
CY2014 CY2015 CY2016 CY2017 CY2018E
Source: Company, Bloomberg consensus
Exhibit 30: Netflix cash potentially produce 20 original series in India (200 hours of original content)
Netflix India CY2019E

Paying subscribers (mn) 1.0
ARPU (Rs/sub/month) - net of GST 551
Subscription revenue (Rs mn) 6,610
Potential cash spend on content (@75% of revenues) 4,958
- Potential cash spend on digital rights of movies (Rs mn) 1,500
- Potential cash spend on originals (Rs mn) 3,458
Average content cost per hour (Rs mn) 17.5
Hours of original content that Netflix can be produce in India- hypothetical 198
Average number of hours per series 10
Number of series that Netflix can produce (hypothetical) 20
Source: Company, Bloomberg consensus
3. Technology and data analytics. About 75-80% consumption on Netflix, globally, is

driven by its recommendation engine. Although content discovery would not matter
in India given relatively limited local language content, it would give a strong
competitive advantage in the medium to long term. Another important strength of
Netflix is its intense obsession with data and using data/insights as a key input for
content decisions. It shortens the learning curve and can somewhat compensate for
the lack of adequate understanding of audience preferences in a new market.
4. Multiple monetization avenues. The scale and opportunity of Amazon’s

ecommerce business in India can justify and support Prime video’s content
investments.

India Media
Our thoughts on monetization strategy of Netflix and Amazon Prime
While Prime video is a value-proposition in India, Netflix is a premium-offering at `500-

800/month. We note that Netflix strives to be a value-proposition in almost all markets it
operates in and Reed Hastings on the recent earnings call reiterated the same about India.
This essentially means that either Netflix would produce a lot of content that justifies its
price to an Indian viewer or else slash prices at some point if it sees subscriber growth
slowing. We would not be surprised if Netflix reduces its price point at some point in the
next 1-2 years. This is likely once Jio achieves some critical scale in the fixed-line broadband
business. We expect both Amazon Prime and Netflix apps to be available to Jio’s fixed-line
users through smart set-top boxes. We note that Netflix already has a deal in place with Tata
Sky and Hathway. Lastly, even after all efforts, if SVOD subscriber growth falls short of
expectations, Netflix and Amazon prime may contemplate experimenting with the AVOD
model in India. We note that there is chatter about Netflix and Prime contemplating
introduction of advertising in some markets at some point in the foreseeable future.
 Jio— Jio’s platform-play ambition is well-known. The company is in the process of

stitching together all its offerings - telecom (wireless + fixed-line)— media— retail
(ecommerce + offline retail). We note that it is augmenting its content capabilities
through a stake purchase in (1) Balaji Telefilms (25% stake acquired for `4.1 bn), (2) Eros
international (5% stake acquired for US$47 bn), and (3) acquired 1% from Viacom in
Viacom18 (51:49 JV between RIL and Viacom Inc after this transaction of 1%) to gain
operating control of Viacom18. We note that RIL owns TV18 group that operates 45-50
channels spanning a portfolio of English, Hindi and regional news and Viacom18’s
portfolio of entertainment channels.
At the scale at which it operates and the opportunity size that it is eyeing, it can justify
and support any investment in content and can economically outspend others. To put it
in perspective, we expect `12-15 bn of cash investments over the next 18 months in OTT
originals (excluding sports and movie rights) in India. This number builds in a modest
investment from Jio given the lack of visibility even though technically Jio could have the
lion’s share in content investments. Jio’s flexibility to bundle offerings to offer a value-
proposition is unparalleled in India.
Lastly, about 55-60% of India’s overall OTT traffic and 65-70% of OTT consumption on
mobile is supported by Jio’s telecom network. Its share will increase further following the
launch of its fixed-line broadband offering. We note that at present, Jio pays broadcasters
and content producers for content available on JioTV and JioCinema. We would not be
surprised if it demands some revenue share or carriage in future if some of these OTTs
start garnering sizeable advertising revenue. It is worth noting that RIL is a savvy and
tough negotiator in B2B deals; we are hearing that Jio would soon be one too.

Media India
Exhibit 31: About 55% of total digital video traffic (wireless+fixed-line) is supported by Jio's network
60
55
50
40
30
20
15
10
0
Jio's share in India's digital video traffic (%) Dish TV's share in Pay-TV subscribers (%)
 Hotstar— Hotstar’s early investments are reaping rewards as visible from key metrics that
are far ahead of its local competitors. It has made its mark and earned respect having
handled large volumes of concurrent live streaming during IPL; very few platforms in the
world can achieve this feat. Buoyed by this success and Disney parentage, Hotstar has all
the ingredients to be the leading OTT platform among professional content OTT
platforms (i.e. excluding YouTube and Facebook) in terms of total watch time.
Our earlier hypothesis was that Hotstar may not invest in original entertainment content
in the near term in view of its heavy commitment towards sports. However, we believe its
investment appetite may increase under Disney. We note that the company recently
appointed a new head of original entertainment content production. In our view, Hotstar
is best-positioned among broadcaster-led platforms to be able to attract a strategic
investment that can further strengthen its positioning and lead. We note that Hotstar’s
current CEO is on his way out to join Facebook as its India head.
 YouTube and Facebook. Even as these players do not attract a lot of attention in the
OTT discussion, they are as serious players in the game as anyone else irrespective of lack
of professional content. It is worth noting that YouTube is the largest entertainment
channel in terms of reach and ad revenues, well ahead of Star Plus. Further, its daily reach
in the top 8-10 cities is not far behind that of the Hindi GEC genre. YouTube has recently
signed A.R. Rahman for an original show and we expect Facebook to take a plunge in
content sooner than later. We note that Facebook was one of the top bidders for the
digital rights of IPL. Key strengths of these players are (1) unparalleled MAUs and DAUs in
India, (2) evolved recommendation engine driving solid engagement, (3) digital sales force
already clocking more than US$200 mn+ and US$100mn+ of digital video advertising
respectively (CY2017).

India Media
Exhibit 32: YouTube India’s daily reach is higher than Star Plus Exhibit 33: YouTube India to surpass Star Plus in ad revenues
Daily reach of YouTube India and Hindi GECs, Aug 2018 (mn) Ad revenues of YouTube and Hindi GECs, CY2018/FY2019 (Rs mn)
350 25,000
300
20,000
250
15,000
200
150 10,000
100
5,000
50
0
0 Youtube Star Plus Zee TV Colors Sony Ent. Sun TV
Youtube India Hindi GEC Star Plus India
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates
 Other players—We expect Voot, Eros Now and Alt Balaji to eventually integrate/fully
align with Jio in view of Jio’s ownership in these entities. Sony Liv and Sun NXT do not
seem to have adequate focus and strategy in place to compete with the big boys. ZEE5 is
lagging but has the mettle to succeed; we expect it to strengthen its positioning either
through consolidation with other broadcaster-led platforms or partnering with players
with complementary strengths.
Exhibit 34: We expect consolidation in the number of apps

Media India
#4: Impact on profitability

This is a tricky question as economics of the OTT business has not stabilized yet even in
developed markets. That said, it is safe to assume that return on investment or profitability
of OTT platforms will be much lower than that of television in the initial years. Key reasons—
(1) higher cost of content production and procurement. An average TV soap runs for 300+
episodes whereas digital originals have 8-10 episodes per season. Cost of sets and other
fixed costs are apportioned over 300+ episodes that reduce per episode production cost.
Even a modest-budget digital original series can cost more on per episode basis than a TV
soap. On an average the cost of production per hour is 30-50% higher in case of digital
originals as compared to TV (everything else being same). Other than this, we gather that
Amazon Prime’s aggression has resulted in unreasonable inflation in digital rights of movies.
From a monetization perspective, digital garners higher yields on advertising and

subscription front. However, till the time it scales up in terms of absolute numbers, revenues
may not cover operating costs. .
We believe medium-term profitability will be a function of the number of players in the

market. Network effect and economies of scale benefits may be more acute in case of digital
platforms.
Exhibit 35: Forecast of ZEE5, March fiscal-year ends, (Rs mn)
FY2019E FY2020E FY2021E Comments

Revenues 1,220 2,406 3,933
- Ad revenues 730 1,369 1,956 Assumed some pressure on digital yields due to over-supply of digital video ad inventory.
Subscription revenues from content deals w ith telcos and direct subscribers. We have assumed
- Subscription revenues (Rs mn) 490 1,036 1,976
ZEE5 to close deal J io TV by end of FY2019E.
Operating expenses
- Programming costs 1,700 2,450 3,400 Programming cost of digital originals + Amortization cost of movie rights and overseas content
- Marketing and ad expense 1,100 1,375 1,500
- SG&A and CDN costs 1,280 1,813 2,238
Total operating costs 4,080 5,638 7,138
EBITDA (2,860) (3,232) (3,205)
Key assumptions
Daily Active Users (DAUs) in mn 4.0 7.0 10.0
Engagement / DAUs (hours) 0.5 0.67 0.67
Paid subscribers ('000s)

- Paying Direct subs ('000s) 300 1,500 3,000
- Indirect subs through Telcos ('000s) 2,500 4,000 7,000
Blended ARPU (Rs/sub/month)
- Direct subs ARPU (Rs/sub/month) 36 36 36
- Indirect subs ARPU (Rs/sub/month) 12 8 8
Original programming hours 200 300 400

Blended cost of programming (Rs mn/hr) 4.0 4.5 4.8
Amortization of movies and overseas content 900 1,100 1,500
Notes:
(1) Above revenues and costs are incremental to investments made in the traditional business. For instance, above content costs does not include transfer pricing cost of TV content library
of Zee Netw ork. SG&A does not include allocation of corporate overheads. Marketing and promotional expense is also incremental to existing budget of Rs5-6 bn of broadcasting
business. Zee can alw ays shift marketing expense from traditional medium to ZEE5 if needed.

India Media
#5: Valuation: Historical multiples do not matter as rules of the game are being
redefined
Indian broadcasters have long-enjoyed premium valuations due to a combination of factors
(1) broadcasters capture the bulk of the value in Indian TV industry value chain, (2) longevity
of growth opportunity (viewed as a proxy to the India consumption story) and comfort on
profitability, (3) structural improvement in Pay-TV subscription revenue led by digitization
and the huge subscription opportunity size in view of subdued ARPUs and under-
penetration of TV.
A 28-30X earnings multiple implied in case of Zee (1) 13-14% CAGR over the next 15 years,
(2) stable profitability and cash generation, (3) Cost of equity of 11-11.5%, and (4) terminal
growth rate of 5.5-6%. These expectations looked achievable in the absence of risk from
digital video or if one assumes that well-run broadcasters will retain their share in the overall
video space (TV + video). We note that revenue CAGR of 13-14% over the next 15 years
looks reasonable for the overall video industry. The business model is undergoing a change
and the rules of the game are being redefined by new players. Given this, any benchmarking
to historical valuation multiples would be inappropriate.
We cut target PE multiple of broadcasting business by 33% to 16-19X and ascribe 1-

2X to factor OTT optionality
The disruption of TV by OTT is certain; it is just a matter of time— we believe some impact
of digital video on TV will be visible 3-4 years from now. Traditional broadcasters, worldwide,
have lost market share and mind share to the next-gen media companies such as Netflix and
Amazon Prime, etc. It was due to a few costly mistakes made by incumbents and
complacency in responding to new competition. In comparison, Indian broadcasters
especially Star, Zee and Viacom are a lot more vigilant and are preparing for the opportunity
that digital video has to offer. Nonetheless, it may be difficult for incumbents to retain
market share in the overall video space in view of heavy-weight competition in the digital
video space. Players who successfully transition and manage to maintain their fair share in
the digital ecosystem would be re-rated in the medium term. In the interim, we expect
pressure on multiples.
We lower our target PE multiple for Zee and Sun to 19X and 16X (from 28X and 24X). We
ascribe an additional 2X and 1X PE multiple to factor in the optionality of ZEE5 and Sun NXT.
Our revised TP for Zee is `430 (`600 earlier) and Sun is `660 (`925 earlier).
Exhibit 36: We lower our target multiple for the core broadcasting business of Zee and Sun
Dividend-discount model based fair PE derivation
Revised Earlier
Zee Sun Zee Sun Comments
Base y ear EPS (Rs/share) 100 100 100 100 Expect deflationary pressure on satellite (TV ) rights of mov ies as OTT gains
Base y ear pay out ratio (%) 78 93 59 85 share. It w ill reduce capex andimprov e cash generation. We assumed
Terminal y ear pay out 78 93 59 85 Pay out ratio (%) to be same as F CF / PAT (%).
High-grow th phase
# y ears 10.0 10.0 15.0 15.0 We reduce 'high-grow th' phase to 10 y ears (from 15) and low er div idend
Div idend grow th - HGP (%) 12.0 8.0 13.9 10.0 (i.e. F CF ) CAGR to factor potential risk from digital 3-4 y ears out
Terminal grow th- TG (%) 4.0 4.0 5.5 5.3 We low er terminal grow th rate and marginally increase WACC (same as Ke
WACC (%) 12.0 12.5 11.0 11.5 in this case) in v iew of rise in risk premium and to factor potential risk from
digital v ideo in the medium term
Fair PE (X) 19.0 16.0 28.0 24.0
Terminal value as % of total 54.4 47.4 59.1 48.7

Media India
Exhibit 37: Zee: Dividend-discount model based fair PE derivation under different scenarios
Payout ratio (%) HGP (years) HGP-Growth (%) TG (%) WACC (%) PE (X)
70 7 10.0 4.0 12.0 13.3
70 7 11.0 4.0 12.0 14.0
70 7 12.0 4.0 12.0 14.7
Bear case
70 7 13.0 4.0 12.0 15.5

75 7 10.0 4.0 11.5 15.2
75 7 11.0 4.0 11.5 16.0
75 7 12.0 4.0 11.5 16.8
75 7 13.0 4.0 11.5 17.7
75 10 10.0 4.0 12.0 15.7
75 10 11.0 4.0 12.0 16.8
75 10 12.0 4.0 12.0 18.0
Base case
75 10 13.0 4.0 12.0 19.3

80 10 10.0 4.0 11.5 17.9
80 10 11.0 4.0 11.5 19.2
80 10 12.0 4.0 11.5 20.6
80 10 13.0 4.0 11.5 22.1
65 15 11.0 5.0 11.5 19.9
65 15 12.0 5.0 11.5 22.0
65 15 13.0 5.0 11.5 24.3
Bull case
65 15 14.0 5.0 11.5 27.0

65 15 11.0 5.5 11.5 20.7
65 15 12.0 5.5 11.5 23.0
65 15 13.0 5.5 11.5 25.5
65 15 14.0 5.5 11.5 28.3

India Media
Exhibit 38: Sun: Dividend-discount model based fair PE derivation under different scenarios
Payout ratio (%) HGP (years) HGP-Gr (%) TG (%) WACC (%) PE (X)
90 7 6.0 4.0 12.5 13.2
90 7 7.0 4.0 12.5 13.8
90 7 8.0 4.0 12.5 14.5
Bear case
90 7 9.0 4.0 12.5 15.3

95 7 6.0 4.0 12.0 14.7
95 7 7.0 4.0 12.0 15.5
95 7 8.0 4.0 12.0 16.3
95 7 9.0 4.0 12.0 17.1
90 10 7.0 4.0 12.5 14.5
90 10 8.0 4.0 12.5 15.5
90 10 9.0 4.0 12.5 16.5
Base case
90 10 10.0 4.0 12.5 17.7

95 10 7.0 4.0 12.0 16.2
95 10 8.0 4.0 12.0 17.4
95 10 9.0 4.0 12.0 18.6
95 10 10.0 4.0 12.0 19.9
90 15 8.0 5.0 12.0 18.9
90 15 9.0 5.0 12.0 20.8
90 15 10.0 5.0 12.0 22.9
Bull case
90 15 11.0 5.0 12.0 25.3

95 15 8.0 5.5 12.0 20.7
95 15 9.0 5.5 12.0 22.8
95 15 10.0 5.5 12.0 25.1
95 15 11.0 5.5 12.0 27.7

Media India
Exhibit 39: Valuations of broadcasters have de-rated across the world

1-year forward P/E multiples of key TV broadcast networks across the world
US: 1-year forward P/E band of select TV broadcasters Europe: 1-year forward P/E band of select TV broadcasters
Average (Disney, Fox, Time Warner, CBS, Discovery and Viacom) Vivendi (France) RTL Group (Europe) Mediaset (Italy)
20 45
40
17
35
14 30
25
21.2
11 10.7
20
15 12.2
8
10 12.1
5 5
Mar-…
Mar-…
Mar-…
Mar-…
Mar-…
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Mar-18
Mar-14
Mar-15
Mar-16
Mar-17
Jun-17
Jun-18
Jun-14
Jun-15
Jun-16
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Jun-15
Jun-14
Jun-16
Jun-17
Jun-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Note: Time Warner and Fox excluded from computation of average post merger announcement.
Mexico and Spain: 1-year forward P/E band of select TV broadcasters Indonesia: 1-year forward P/E band of select TV broadcasters
Mediaset Espana (Spain) Grupo Televisa (Mexico) Surya Citra Media Nusantara Citra
45 35
40 30
35
25
30
26.7
20
25
15
20 15.4
15 10
11.0 6.9
10 5
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Mar-17
Mar-18
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-14
Mar-15
Mar-16
Jun-16
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-14
Jun-15
Jun-17
Jun-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
India: 1-year forward P/E band of select TV broadcasters Japan: 1-year forward P/E band of select TV broadcasters
Zee Sun TV Asahi Fuji Media

40 25
22
30 19.8
19
17.9
25.1
16
20
18.3
13
10 10
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Mar-15
Mar-14
Mar-16
Mar-17
Mar-18
Jun-15
Jun-18
Jun-14
Jun-16
Jun-17
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Source: Bloomberg, Kotak Institutional Equities estimates

REDUCE
Zee Entertainment Enterprises (Z)
Media OCTOBER 11, 2018
CHANGE IN RECO.
Coverage view: Attractive
Odds mount. We downgrade Zee to REDUCE from ADD as (1) we expect a shift in ad Price (`): 459
spends to OTT from TV in the next 3-4 years, (2) competition in the OTT space is more Target price (`): 430
ferocious than anticipated and it may be difficult for Zee to maintain its fair share in
BSE-30: 34,761
OTT market. We cut PE multiple to capture the medium-term risk to TV business and
uncertainties in OTT. We now value Zee at 21X Sep-20E earnings (19X for core business
and 2X for optionality that ZEE5 offers) versus 28X earlier; revise TP to `430 (`600).
Co mpa n y d a t a a n d va lua t io n s umma r y
Zee Entertainment Enterprises
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) 619-410 EPS (Rs) 16.7 19.6 22.1
Market Cap. (Rs bn) 441.0 EPS growth (%) 11.4 17.1 12.6
Shareholding pattern (%) P/E (X) 27.4 23.4 20.8
Promoters 41.6 Sales (Rs bn) 77.7 88.8 101.2
FIIs 40.8 Net profits (Rs bn) 16.1 18.8 21.2
MFs 6.0 EBITDA (Rs bn) 25.3 28.5 32.1
Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.1 14.2 12.5
Absolute (2.9) (14.7) (12.2) ROE (%) 19.9 20.6 20.5
Rel. to BSE-30 6.0 (11.1) (19.3) Div. Yield (%) 1.0 1.2 1.5
Indian OTT’s ‘e-com’ moment

The interest and investments of global companies in India’s OTT space are overwhelming and
perhaps disproportionate relative to the monetization opportunity. At an industry level, we
expect aggregate cash spends of `12-15 bn on digital video content (entertainment excl. sports
and movies) over the next 18 months versus `70-75 bn/year on TV. Given this, we expect
(1) talent scarcity and content cost inflation, (2) Netflix, Amazon and Jio may outspend others in
content procurement, and (3) either digital subscription revenue picks up meaningfully to justify
these investments (looks difficult) or else OTT players (including Netflix and/or Prime) opt for the
advertising-led model, accelerating a shift of ad spends to OTT from TV.
ZEE5 may have to revisit strategy in view of competitive landscape
Three key attributes for success in OTT are (1) content, (2) product/technology and (3) capital.
ZEE5 scores well on #1 but scores low on #2 and #3 relative to the competition. Further, Zee’s
margin guidance compels it to invest judiciously. Meanwhile, less constrained peers are taking
the long view, outspending Zee thanks to monetization avenues in associated businesses
(telecom/ecommerce/global viewer base). Zee’s core strengths are (1) ability to produce content
with cost efficiency and scale, and (2) strong audience-connect in the large Hindi-speaking and
regional markets. We believe ZEE5 could better capitalize on these strengths and somewhat
insulate itself from the irrational competition scenario if it found a JV partner with
complementary attributes. Obvious names that come to mind are Flipkart, Hotstar, Airtel,
Chinese internet players and AT&T-TWC.
Valuations—historical multiples do not matter when rules of the game are being redefined
Zee’s historical premium valuation was predicated upon solid execution and sustained growth
opportunities. Even as the core business performance is flawless, we turn cautious as (1) we
expect OTT to start gaining ad revenue share from TV in 3-4 years, (2) the digital video
ecosystem is crowded with heavyweights, and (3) ZEE5’s progress is short of our expectations
Jaykumar Doshi
and the aggression demanded by the competitive landscape. We incorporate 2Q and tweak our jaykumar.doshi@kotak.com
earnings to model higher investments in ZEE5. We cut TP to `430 (`600 earlier), valuing it at Mumbai: +91-22-4336-0882
21X Sep-20E earnings (19X for core + 2X for optionality of ZEE5; 28X earlier). Despite limited
downside after the recent correction in the stock price, we recommend REDUCE and prefer to
stay on the sidelines until we see creditable progress in ZEE5 and/or any favorable change in the
competitive landscape. Please refer to page 11 for 2Q results analysis and key takeaways.

Mumbai: +91-22-4336-0000
Media Zee Entertainment Enterprises
What has made us cautious on Zee?
 Competitive intensity higher than anticipated. The interest and investments of global
players in the Indian OTT space are overwhelming and perhaps disproportionate relative
to the monetization opportunity. Our earlier assessment was that Netflix and Amazon
Prime will cater to the top 5-10%, leaving rest of the market for local players. The
underlying hypothesis was that subscription opportunity in India is too small for these
behemoths to focus. However, we note the following.
 Netflix and Amazon Prime video. Netflix’s spends on ‘Sacred Games’ were
unprecedented in the Indian context and it is likely to step up investments in CY2019.
We would not be surprised if it ramps up to produce two shows/month in India by
mid-CY2019. Prime video is on a movie-buying spree in India (Exhibit 1) and paying
top dollar. Additionally, it is also churning out originals at regular intervals. Clearly,
Netflix and Prime have aspirations to cater to the broader market and not just a niche
audience. We would not be surprised if they experiment with AVOD at some point or
Netflix halves subscription price to become a broad-based product from a premium
product.
 Jio and Hotstar. Jio is a savvy negotiator in B2B deals. Its bargaining power as a
distributor will increase further as it forays in the fixed-line broadband and Pay-TV
distribution. Separately, Jio is also augmenting content capabilities (24.9% stake
purchase in Balaji Telefilms and 5% stake in Eros and operating control in Viacom18).
We gather that Hotstar may resume its investments in originals soon encouraged by its
success in sports (IPL).
 YouTube and Facebook. YouTube India has just begun original shows and Facebook
may do so sooner than later. Both these companies have daily active user (DAU) base
of about 200 mn, impressive engagement metrics and sizeable digital video ad
revenue stream growing at 40-50%+ annually. Investments in content would further
strengthen their positioning in the AVOD space.
We see a possibility of elevated content investments disproportionate to OTT opportunity

size (as we foresee today), by a number of players with deep pockets.
 Unstoppable traction in digital video consumption. We gather that aggregate video-

watch time is growing in the vicinity of 100% yoy for players who are doing well. More
importantly, MAUs, DAUs and engagement metrics are all trending in the right direction
and ahead of expectations. Consumption trends may change faster than expectations,
especially if the ecosystem evolution continues (fixed-line broadband proliferation and 5G
implementation in the next 3-5 years).
 ZEE5—ZEE5 app has been conceptualized and designed well keeping in mind nuances of
Indian viewers and ecosystem constraints. However, the pace of implementation lags
expectations and makes us wonder if ZEE5 has the right set of technology partners to
compete against heavyweights. Separately, it looks like Prime video is gearing up to
become a key destination for Indian films, a positioning that ZEE5 was eyeing.
In a nutshell, Zee’s fortunes are not only dependent on ZEE5’s execution but also on
strategy and execution of its heavyweight competition. Zee’s core strength is its
understanding of the Indian mass market and ability to cost-efficiently produce content at
scale. Even as this is an important competitive edge, it may not be sufficient in an irrational
competitive environment. Zee’s listed status does not allow it the luxury of making huge
investments akin its unlisted or pseudo-unlisted competitors.

Zee Entertainment Enterprises Media
Exhibit 1: Our 10-point framework to assess strengths of OTT players

Content
Others
Our thoughts on Zee’s movie strategy

Zee stepped up investments in movies starting FY2017 after exiting sports broadcasting—
largely towards purchase/advance for satellite rights of movies plus partly for
purchase/advance of digital rights and partly towards w-cap for the movie production
business. Over the past two years (FY2017-18), Zee has invested (cash outgo) about `22-25
bn in movies, much higher than previous years (annual run-rate was about `4-5 bn over
FY2013-16). These investments were made with an objective to further strengthen its
positioning in the movie genre on TV and to position ZEE5 as a key digital destination for
Indian language films.
We see two risks to this strategy—
 Amazon Prime video has spoilt the movie rights market. Our industry interactions
suggest that Prime Video is on a movie-buying spree and paying top dollar for digital
rights. We note that it has 54% share in top-25 Hindi movies released in the past 12
months (Exhibit 2). More importantly, it looks like Prime video’s recent buys are all
exclusive rights for which it may have paid a huge premium; this corroborates with what
we are hearing from industry participants. This has resulted in irrational inflation in cost of
digital rights of movies. We believe this inflation can upset Zee’s strategy and compel it to
either increase budget or buy fewer films than planned earlier.
 Hindi movie genre on TV looks susceptible to disruption from OTT. Our analysis of
viewership composition of genres indicates that paid Hindi movie genre could be more
vulnerable to disruption from OTT as compared to other sub-genres within the Hindi and
regional entertainment space. We note that higher share of (1) male viewers, (2) NCCS
A+B, (3) under-40 age group and (4) urban audience, makes a genre more vulnerable to
shift of consumption to OTT. Further, theatrical window for digital release of a film is
eight weeks whereas that for TV release is 12 weeks.
As of now, most of the popular movies are behind the pay-wall and ad-free. Thus, there
is no visible risk to ad spends garnered by the movie genre on TV. However, at some
point if OTT platforms open up for advertising on blockbuster movies, it can lead to some
shift of ad spends to OTT from TV. Subsequently, it can result in deflationary pressure on
ad yields of movie channels and price of satellite rights. It is worth noting that price paid
for satellite rights of movies is based on revenue potential estimated over five years (life of
movie rights) and it assumes sustained growth in ad yield and consumption. Any change
on the latter can deteriorate RoIs of movie rights purchased in the past.

We note that Zee management has indicated moderation in movie capex in FY2019,
essentially normalization following significant investments over the past two years. That
said, it could also be due to inflation in purchase in digital rights of movies.
Exhibit 2: Amazon Prime video dominates purchase of digital rights of blockbuster movies
Digital rights of top-25 Bollywood movies released during Jun 2017-Jun 2018
NBOC
(Rs mn) Prime Jio ZEE5 Eros now Hotstar Netflix
Bollywood
1 Tubelight 23-Jun-17 1,170 a a
2 Mubarakan 26-Jul-17 531 a
3 Jab Harry Met Sejal 4-Aug-17 577 a
4 Toilet-Ek Prem Katha 11-Aug-17 1,350 a a
5 Bareilly Ki Barfi 18-Aug-17 340 a a
6 Baadshaho 1-Sep-17 665 a a
7 Shubh Mangal Saavdhan 1-Sep-17 419 a a a
8 Judwaa 2 29-Sep-17 1,333 a a
9 Secret Superstar 20-Oct-17 596 a
10 Golmaal Again 20-Oct-17 2,045 a a
11 Tumhari Sulu 17-Nov-17 330 a
12 Fukrey Returns 8-Dec-17 746 a
13 Tiger Zinda Hain 22-Dec-17 3,280 a
14 Padmaavat 26-Jan-18 2,823 a
15 Padman 9-Feb-18 813 a a
16 Sonu Ke Titu Ki Sweety 23-Feb-18 1,050 a
17 Hichki 23-Feb-18 425 a
18 Raazi 11-May-18 1,205 a
19 Raid 16-Mar-18 1,019 a
20 Baaghi 2 30-Mar-18 1,582 a
21 Parmanu - The Story Of Pokhran 25-May-18 625 a a
22 October 13-Apr-18 369 a
23 102 Not Out 4-May-18 466 a
24 Veere Di Wedding 1-Jun-18 859 a
25 Race 3 15-Jun-18 1,676 a
Total count 12 6 1 6 9
Share in NBOC (%) 53 9 1 20 18
a Exclusive digital rights a Non-exclusiveExclusive

digital rights
digital rights

Exhibit 3: Amazon Prime loaded with blockbuster movies; ZEE5 focuses on smaller movies with a
good storyline
Opportunities and optionality

Nuances of Indian video ecosystem that favour local broadcasters
Even as broadcasters globally have struggled to compete against Netflix, there are a number
of nuances (detailed below) of Indian market that gives Indian broadcasters a better chance
against next-gen media companies.
 Low Pay-TV ARPU and lack of price arbitrage. A key reason for early success of Netflix
in most countries was the price arbitrage between cable TV bundle (US$80/month in US)
and Netflix streaming membership (US$11/month). The dynamics are completely opposite
in India and should work in favor of TV.
 Demographic and linguistic diversity. An average Indian family’s size is 4.25

individuals per household; Pay-TV bundle fulfills diverse content preferences of a
household at a nominal price of `250-300/month (about `1/channel). We note that
English accounts for less than 5% of content consumption on TV. Rest of the
consumption is in Hindi, six popular regional languages and a few other smaller regional
languages. In addition, content preferences vary significantly across the socioeconomic
strata. It isn’t easy for a new entrant to disrupt the TV market or alter viewing preferences
of audience so easily.
 Learning from mistakes of global players. As it is well-known, the biggest mistake US

TV networks made was to license TV content to Netflix and that too long-term contracts
that were not structured favorably. This shortsightedness and short-term profiteering of
US broadcasters helped Netflix establish itself. Another mistake was not picking up the
change in consumption patterns and not investing in their own OTT platforms on time.
For example, Viacom’s content and viewer base was heavily skewed towards youth and
yet it didn’t invest in OTT platform and instead used surplus cash for buybacks. We
believe Indian broadcasters are unlikely to make these mistakes.

That said, we do note that broadcasters (including Zee) are occasionally selling rights of
select content other OTT platforms. For instance, Zee has licensed rights of a popular
show of &TV to Netflix. It recently sold digital rights of its co-produced Hindi
movie, ‘ Dhadak’ to Amazon prime video.
 Early investment and focus on digital relative to global peers. Even as OTT is still in
its early days in India, several Indian broadcasters have invested in their own OTT
platforms. Hotstar stands out at a global level in terms of its ability to handle large
volumes of live-sports streaming.
 Other nuances of ecosystem. Even as the digital ecosystem is rapidly evolving, India
significantly lags other nations on a few parameters that are essential for widespread
consumption of OTT—(1) fixed-lined broadband penetration, (2) small share of LCD TV
sets/smart TVs that enable streaming on large screen and (3) low penetration of
smartphone. These nuances would allow OTT players some time to get their act together.
While the above factors give local Indian broadcasters better chance to compete against the
global players, we expect it to be partly offset by high competitive intensity. India is one of
the few markets that is attracting serious competition from all quarters—Netflix to Jio to
Youtube.
Key inherent strengths of Zee for OTT
 Content library. Zee has a vast content library (about 250,000 hours as per FY2018
annual report). The management has indicated that its movie library has 4,100 titles that
include about 3,000 dual rights (satellite + digital).
 Exposure to genres and markets that are less susceptible to disruption from OTT.
Zee network has no/negligible exposure to genres such as sports, kids, music and English
that are highly vulnerable to TV-to-OTT consumption shift. Contrarily, about 43% of
Zee’s viewership comes from regional genres that relatively more immune to digital. It
essentially makes Zee less vulnerable to TV-to-OTT shift as compared to its broadcasting
peers, at least in the near term.
 Opportunities to consolidate its position in TV. Zee’s network viewership share has
steadily increased over the past few years. It is about 19-20% at present as compared to
16-17% two years ago. Zee’ viewership share gain has been largely driven by regional
markets. Zee has opportunity to further strengthen its market share, especially so as there
is a possibility that its competition in the TV space may lose some focus from TV in the
event of a TV-to-OTT shift.
What can Zee do to de-risk ZEE5 from intense/irrational competition?

We continue to believe that Zee has ingredients to be successful in the OTT space and
emerge as a key OTT destination for Indian-language entertainment content for the mass-
market audience. However, for this to play out, competitive intensity has to be benign.
Increasingly we fear that competitive intensity could adversely change the dynamics for Zee.
For instance, price of digital rights of movies is much higher than anticipated earlier,
compelling Zee to increase its movie-buying budget or settle for fewer movies. We consider
a few more scenarios that could play out. Essentially, what if—
 Hotstar raises funding and steps up investments in original content. At present,

Hotstar’s investments (and cash burn) in sports make it difficult for it to adequately invest
in original non-sports entertainment content. With none of the other broadcasters
making serious investments in original entertainment content, there is an opportunity for
ZEE5 to emerge as a #1 OTT on the back of its TV library and digital originals. However,
this scenario can change if (1) Hotstar raises PE funding that allows it to step up
investments in digital originals shows and/or (2) Hotstar gets a mandate from its new
parent, Walt Disney, to invest more and especially in original content. In this case, ZEE5
will be compelled to further step up investments.

 Jio’s content and consolidation strategy. Jio has acquired minority stakes in Eros and
Balaji and RIL owns TV18 group. At a consolidated level, RIL has decent content
capabilities. It can further strengthen its content capabilities if it participates in a few
more consolidation opportunities. In this case, Jio becomes a strong force from the
content perspective.
 Strategy of other broadcasters. At present, most Indian broadcasters have refrained

from licensing its content to Netflix and Amazon. However, one cannot rule out a
scenario whereby some of the smaller/fragmented players license content/movie library
rights to global OTTs or Jio. This can hurt Zee’s prospects.
Thus, there are number of scenarios that can alter ZEE5’s prospects and compel the
management to keep changing its strategy/investment plan depending on the
competitive landscape. In our view, ZEE5 would be better-placed if it operates like a
startup, has solid product/technology capabilities and excess supply of capital. This
can be achieved if Zee considers a JV partnership or raises strategic investment. We
detail our thoughts below
 JV partnership with Flipkart/Airtel. Flipkart’s key competitor, Amazon, and future
competitor, Jio’s ecommerce arm, have luxury of bundling OTT services along with prime
membership. At present, Flipkart has a loyalty program that allows its customers to use
reward points to consume content on platforms such as Hotstar. We believe that any
partnership of ZEE5 and Flipkart could be a win-win for both the companies in view of
complementary attributes. Likewise, Airtel and ZEE5 can also consider a more strategic
partnership beyond the extant B2B digital content deals.
 Hulu-like model with Hotstar. We believe Indian broadcasters would be best-placed to

capitalize on opportunities that OTT has to offer if they were to co-own and operate a
single platform (concept akin Hulu). We do note that Hulu’s success has been suboptimal
so far due to varying priorities of its stakeholders. With the benefit of hindsight, Indian
broadcasters can avoid mistakes made by the stakeholders of Hulu. If Zee and Star come
together for OTT, its combined OTT platform can dominate the Indian OTT market. We
note that both these companies have collaborated in the past (MediaPro distribution JV)
and immensely benefited from it. Such an arrangement in OTT looks difficult as of now
given (1) ongoing Fox-Disney merger and (2) Hotstar has made huge investments and
established itself to some extent; it may prefer to stay solo.
 Strategic investments from PE or preferably Chinese internet players/AT&T-TWC.
We believe ZEE5 can be a key local partner or OTT investment opportunity for a private
equity firm or Chinese internet players interested in Indian OTT space. Although early
days, we do note that Indian movies are gaining popularity in Chinese market. Given this,
we would not be surprised if any of the Chinese tech firms invest in Indian OTT space.
If any of the above three scenarios play out, it would strengthen ZEE5’s ability to
compete and result in re-rating. We partially bake in this optionality by ascribing
additional 2X PE multiple over our target PE multiple of 20X for the broadcasting
business.
Core broadcasting business on a strong footing, thanks to impressive and

consistent execution
Zee’s execution in the core broadcasting business continues to be impressive and consistent.
 Strong outperformance in ad revenue growth to continue—it is worth noting that

Zee has surpassed Star to become #1 network in terms of viewership for the first time in
2QFY19 (Exhibit 4). We track weighted viewership share (Exhibit 5), which is a lead
indicator of ad growth performance versus industry; it continues to trend in the right
direction. We expect Zee to continue to deliver solid growth in advertising revenues for
the next few quarters driven by buoyancy in the TV advertising environment and benefits
of viewership share gains. We note that ad growth over the past four quarters was 20%+
yoy and we estimate 18.7% and 16.5% growth in ad revenues in FY2019E and FY2020E.

 Steady growth in domestic subscription revenues—Zee expects better growth

trajectory for domestic subscription revenues in FY2019 (KIE 15%) as monetization
benefits of phase-III digitization resume; it had not fully accrued due to pending
implementation of tariff order. Additionally, Zee has gained network viewership share
that helps in negotiations/renewals. We do note that Zee has renewed its digital content
deal with Reliance Jio.
Exhibit 4: Zee has surpassed Star to become India’s #1 network in terms of viewership (2QFY19E)
Viewership share of top-5 broadcasting networks, 16-Oct-2015 to 17-Aug-2018 (%)
Star network TV18 Network Zee network Sony network Sun network
24
22
21.9
19.9
20
18 18.9
17.7 16.9
16
14.3
14
13.0
12 11.7
11.8 11.0
10
9.1
8
3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E
Notes:
(1) Zee bought two channels from RBNL and sold Ten portfolio in FY2017. Both these transaction were effective from 1QFY18. We have
incorporated the same in viewership share.
(2) Spike in viewership share of Sony (1QFY17 and 1QFY18) and Star (1QFY19) is due to IPL.
(3) TV18 network includes Viacom portfolio (51:49 JV between TV18:Viacom Inc) and ETV (an associate company in which TV18 owns 24.5% stake).
Attributable viewership share of TV18 broadcast (listed entity) is about 6.5% in 2QFY19 (about half that of TV18 network).
Source: BARC, , Kotak Institutional Equities

Exhibit 5: Viewership share gains (yoy basis) will continue to aid Zee's ad growth outperformance
Weighted viewership share of Zee network in Hindi and regional genres (%)
30 Zee's weighted viewership share in Hindi + regional genres (%)
27.9
28 27.5
26.7 26.7
26.3
26
24.7 24.9
24.3
24.0
23.6
24
22
20
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19
Notes:
(1) Above market share working is based on Zee network's quarterly viewership share in its key genres (Hindi
Gec, Hindi movies Hindi FTA GEC+movies and regional GECs) and it uses ad market size of respective
genre as weight
(2) The above calculation does not cover English, music, regional movies and niche genres that collectively
account for less than 10-12% of Zee's domestic ad revenues. Zee's domestic/international ad revenue is
94%/6%.
Our thoughts on profitability

We are not worried about profitability of the core broadcasting business given viewership
trends and tailwinds on advertising and domestic subscription revenue front. Underlying
EBITDA margin of core TV broadcasting business is 35-37% as visible in 2QFY19 results.
Zee’s guidance of 30% EBITDA margin allows it to absorb EBITDA margin loss of 400 bps in
ZEE5 (or absolute EBITDA loss of `3 bn or so). Assuming ZEE5’s revenue of about `1.2 bn in
FY2019E, it allows the company to invest `4.2 bn in the digital platform (FY2019E). We note
that this ~`4 bn investment (operational costs of ZEE5) would be incremental to investments
made in the traditional business. For instance, it does not include transfer pricing cost of TV
content library of Zee Network. SG&A does not include allocation of corporate overheads.
Marketing and promotional expense is also incremental to existing budget of `5-6 bn of the
broadcasting business. Zee can always shift marketing expense from traditional medium to
ZEE5, if needed.

Exhibit 6: Forecast of ZEE5, March fiscal-year ends (Rs mn)
FY2019E FY2020E FY2021E Comments

Revenues 1,220 2,406 3,933
- Ad rev enues 730 1,369 1,956 Assumed some pressure on digital y ields due to ov er-supply of digital v ideo ad inv entory .
Subscription rev enues from content deals w ith telcos and direct subscribers. We hav e assumed
- Subscription rev enues (Rs mn) 490 1,036 1,976
ZEE5 to close deal J io TV by end of F Y2019E.
Operating expenses
- Programming costs 1,700 2,450 3,400 Programming cost of digital originals + Amortization cost of mov ie rights and ov erseas content
- Marketing and ad expense 1,100 1,375 1,500
- SG&A and CDN costs 1,280 1,813 2,238
Total operating costs 4,080 5,638 7,138
EBITDA (2,860) (3,232) (3,205)
Key assumptions
Daily Activ e Users (DAUs) in mn 4.0 7.0 10.0
Engagement / DAUs (hours) 0.5 0.67 0.67
Paid subscribers ('000s)

- Pay ing Direct subs ('000s) 300 1,500 3,000
- Indirect subs through Telcos ('000s) 2,500 4,000 7,000
Blended ARPU (Rs/sub/month)
- Direct subs ARPU (Rs/sub/month) 36 36 36
- Indirect subs ARPU (Rs/sub/month) 12 8 8
Original programming hours 200 300 400

Blended cost of programming (Rs mn/hr) 4.0 4.5 4.8
Amortization of mov ies and ov erseas content 900 1,100 1,500
Notes:
(1) Abov e rev enues and costs are incremental to inv estments made in the traditional business. F or instance, abov e content costs does not include transfer pricing cost of TV content library
of Zee Netw ork. SG&A does not include allocation of corporate ov erheads. Marketing and promotional expense is also incremental to existing budget of Rs5-6 bn of broadcasting
business. Zee can alw ay s shift marketing expense from traditional medium to ZEE5 if needed.

Key highlights from 2QFY19 results and earnings conference call
Exhibit 7: Interim results of Zee Entertainment, March fiscal year-ends (Rs mn)
% chg.
2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 % chg. FY2019E yoy %
Total revenues 19,759 18,870 15,821 17,720 4.7 24.9 11.5 37,479 66,857 (44) 77,660 16
Adv ertising rev enues 12,106 11,940 9,867 11,460 1.4 22.7 5.6 23,566 42,048 (44) 49,911 19
Subscription rev enues 6,082 5,731 5,014 5,186 6.1 21.3 17.3 11,268 20,287 (44) 22,746 12
--Domestic subscription 5,093 4,751 4,043 4,252 7.2 26.0 19.8 9,345 16,388 (43) 18,846 15
--International subscription 989 980 971 934 0.9 1.8 5.9 1,923 3,899 (51) 3,899 -
Other sales (incl. sy ndication) 1,571 1,200 939 1,074 30.9 67.3 46.3 2,645 4,522 (42) 5,004 11
Total expenditure (13,001) (12,870) (10,909) (12,064) 1.0 19.2 7.8 (25,065) (46,095) (46) (52,337) 14
Content and other direct costs (7,263) (7,000) (5,789) (6,683) 3.8 25.5 8.7 (13,947) (25,275) (45) (29,603) 17
Employ ee costs (1,687) (1,970) (1,814) (1,714) (14.4) (7.0) (1.6) (3,401) (6,657) (49) (7,189) 8
Adv t. and publicity costs (1,651) (1,500) (1,410) (1,402) 10.0 17.0 17.8 (3,052) (5,773) (47) (6,466) 12
Other expenses (2,400) (2,400) (1,896) (2,265) 0.0 26.6 6.0 (4,666) (8,390) (44) (9,079) 8
EBITDA 6,758 6,000 4,912 5,657 12.6 37.6 19.5 12,414 20,761 (40) 25,323 22
EBITDA margin (%) 34.2 31.8 31.0 31.9 33.1 31.1 32.6 5
Other income 589 450 422 498 31.0 39.6 18.5 1,087 2,795 (61) 2,214 (21)
F air v alue through P&L (RPS) (220) (290) (148) (213) (24.2) (433) (68) (84) (969) 1,333
F inance costs (b) (55) (53) (3) (53) 3 1,846.4 3.0 (107) (1,448) (93) (100) (93)
D&A expenses (588) (575) (411) (576) 2.3 43.2 2.1 (1,165) (1,821) (36) (2,363) 30
Pretax profits 6,484 5,532 4,772 5,312 17.2 35.9 22.1 11,795 20,220 (42) 24,105 19
Extraordinaries — — 2,955 — - 2,955 - (100)
Tax prov ision (c) (2,624) (1,980) (1,832) (2,071) 32.6 43.3 26.7 (4,695) (8,409) (44) (9,027) 7
Minority interest 2 18 12 18 19 25 30 25 -
Reported PAT (post RPS impact) 3,861 3,570 5,908 3,259 8.2 (34.6) 18.5 7,120 14,791 (52) 15,104 2
EPS post RPS impact (Rs) 4.0 2.6 6.2 3.4 55.6 (34.6) 18.5 7.4 15.4 15.7 2
Adj. PAT (pre-RPS and pre-exceptional) 4,082 3,860 3,161 3,472 5.7 29.1 17.6 7,553 14,428 (48) 16,073 11
Adj. EPS (pre-RPS and pre-exceptional) (Rs) 4.2 4.0 3.3 3.6 5.7 29.1 17.6 7.9 15.0 (48) 16.7 11
Tax rate (%) 40.5 35.8 38.4 39.0 39.8 41.6 37.4
Notes:
(a) F air v alue through P&L (RPS) incorporates MTM changes in RPS liability .
 Ad revenues grew 22.7% yoy aided by low base and viewership share gains (2-yr CAGR
at 12.3%). As per our estimate, outperformance over industry could be about 500-700
bps largely attributable to market share gains.
 Domestic subscription revenue growth at 26% yoy was (KIE 17.5%) was partly aided by
catch-up revenues and benefits of phase III digitization. Zee management has raised full
year domestic subscription revenue growth guidance to mid-teens from low-teens growth
rate.
 EBITDA at Rs6.75 bn (+38% yoy) was 13% above our estimates led by higher than
estimated domestic subscription revenues and syndicate sales. We note that base quarter
EBITDA was impacted by one-time costs pertaining to corporate re-branding. 2QFY19
EBITDA is after factoring ZEE5 loses. EBITDA margin of 34.2% was up 320 bps yoy and
best our estimates by 240 bps.
 Adjusted net profit was 6% above our estimates on account of higher taxes (ETR of
40.5%).
Balance sheet improvement not up to expectations and guidance
On 1QFY19 earnings conference call, Zee’s management acknowledged the feedback of

minority investors around surplus cash invested in overseas funds. The management had
indicated that surplus cash including investments in overseas funds would be brought back
to India in due course of time and switching to low-risk liquid funds from high-yield
securities starting 2QFY19. Given this, we were hopeful of some repatriation of surplus cash
parked in overseas funds to India especially in view of sharp depreciation of rupee. However,
there was no change in treasury management in 2Q. The management reiterated its intent
to bring back surplus cash to India in due course in a calibrated manner. On the positive side,
Zee management indicated that it expects to recover its investment in SGGD sometime in
this month; it expects IRR of 11% on this investment as against original IRR of 17%.

Inventory was broadly flat at Rs27.1 bn in the first half of FY2019. Other current assets
increase to Rs13.8 bn from Rs10.2 bn in the first six months. The management attributed it
to advances paid for movies and other content acquired for ZEE5. Zee management hinted
at moderation of investments in movies in FY2019 as compared to FY2018. This potentially
implies better cash generation in FY2019.
ZEE5—headline MAU encouraging but we would wait for additional disclosures and
for data to stabilize
Zee management indicated that ZEE5 garnered MAUs of 41.3 mn in the month of
September to become #2 digital entertainment platform as per Google analytics data. Its
engagement metric was average daily time spent of 31 mins. Although these numbers are
encouraging, we would wait for data to stabilize and for ZEE5 to share additional metrics
such as DAUs, paid subscribers and daily video viewers used to derive average time spent.
Further, we prefer disclosure of ZEE5 metrics as per App Annie, the most widely-used app
analytics/database in the OTT space. Even better if Zee discloses metrics of competition as
per App Annie allowing analyst/investors to better assess ZEE5’s positioning in competitive
landscape. We present key metrics of OTT players in exhibit 9.
We note that Zee management has indicated pick up in digital content production. It has
launched about 29 shows of original content so far (less than 100 hours) and it plans to
launch another 60 shows over the next 6-9 months. This target looks a bit aggressive to us.
Separately, the management indicated that it intends to release 600 hours of original
content (including re-cap part; first few mins of an episode) over the next 18 months. This
target also looks fairly stretched to us.
Renewal content deal with Jio
We note that Zee had pulled out its content from JioTV in August 2018 as negotiations
failed. This content deal has been renewed. There are two parts to this deal (1) Live TV. All
37 channels of Zee network would be available on Jio TV. Jio Prime users will have free
access to this content through JioTV app and Reliance Jio would pay a certain amount to Zee
for this content. In this case, the content consumption happens on Jio TV app but Zee would
get consumption data/metrics from JioTV, (2) Original/premium content— The above deal
does not cover premium/original content available on ZEE5. Jio subscribers would have to
pay for this content. This is an app-in-app deal.

Exhibit 8: Zee's consolidated balance sheet (Rs mn)
Mar-18 Sep-18 YoY (%) Comments

EQUITY AND LIABILITIES
Equity
Share capital 961 961 0
Other equity 74,657 80,605 8
Total equity 75,617 81,565 8
Minority Interest 142 131 (8)
Non-current Liabilities
Long-term borrow ings 15,245 15,832 4
Long-term prov isions 892 954 7
Other Non-current liabilities 10 8 (13)
Total non-current liabilities 16,146 16,794 4
Current liabilities
Trade pay ables 11,497 12,128 5
Other current liabilities 4,017 3,593 (11)
Short-term prov isions 83 95 15
Income tax liabilities / DTL 3,795 4,691 24
Total current liabilities 19,391 20,507 6
Total equity and liabilities 111,297 118,997 7
ASSETS
Non-current assets
F ixed assets 6,005 6,275 4
CWIP 920 1,096 19
Inv estment property 1,555 1,587 2
Goodw ill 5,467 5,472 0
Intangible assets 1,734 1,715 (1)
Non-current inv estments 1,593 1,491 (6)
- Inv estments in associates 2 3
- Inv estments in J V s 194 213 10
- Other inv estments 1,397 1,276 (9)
Deferred tax assets (net) 0 0
Income tax assets 7,026 6,806 (3)
Other non-current assets 340 328 (3)
Total non-current assets 24,640 24,769 1
Current assets
Includes inv estments in (1) unknow n/unfamiliar ov erseas funds of about
Current inv estments 13,695 12,453 (9) US$80 mn, (2) Rs1.7 bn in SGGD, and (3) balance in domestic MF s and CDs.
Inventories 26,278 27,107 3
Trade receiv ables 15,365 18,684 22
Cash and bank balances 16,117 14,391 (11)
Comprises of inter-corporate deposits of w hich from Rs1 bn+ is lended in
Short-term loans and advances 2,428 2,173 (10) ov erseas goegraphies.
Other financial assets 2,556 5,591 119
Other current assets 10,218 13,830 35
Total current assets 86,657 94,228 9
Total assets 111,297 118,997 7

Exhibit 9: Key metrics of OTT players in India, Aug 2018

Youtube 220-240 170-190 50-60
F acebook 200-220 140-160 30-40
Hotstar (a) 75-100 14-18 35-40
J ioTV Liv e 40-50 8-10 25-30
Prime V ideo 25-35 5-7 40-45
Netflix 10-15 4-5 40-45
V oot 30-40 4-6 35-40
Airtel TV 15-20 5-7 25-30
ZEE5 41 NA 31
SONY LIV 20-30 3-5 20-25
J ioCinema 8-15 2-3 25-30
Sun NXT 2-5 0-0.5 35-40
Notes:
Source: Industry interactions, Kotak Institutional Equities estimates
Exhibit 10: Revised earnings estimates of Zee, FY2019E-21E (Rs mn)
Revised Previous % change

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E
Consolidated
Ad revenues 49,911 57,896 66,581 49,616 57,307 65,616 0.6 1.0 1.5
Subscription revenues 22,746 25,290 28,284 22,586 25,400 28,637 0.7 (0.4) (1.2)
Other operating revenues 5,004 5,634 6,344 5,083 5,810 6,543 (1.5) (3.0) (3.0)
Total revenues 77,660 88,820 101,209 77,284 88,517 100,796 0.5 0.3 0.4
Direct costs 29,603 35,255 41,357 30,075 35,114 40,858 (1.6) 0.4 1.2
Employee cost 7,189 8,052 9,018 7,655 8,574 9,603 (6.1) (6.1) (6.1)
SG&A expenses 15,545 16,974 18,746 15,542 16,713 18,308 0.0 1.6 2.4
Total expenditure 52,337 60,281 69,121 53,271 60,400 68,768 (1.8) (0.2) 0.5
EBITDA 25,323 28,539 32,088 24,013 28,117 32,028 5.5 1.5 0.2
PAT 15,104 17,849 20,358 15,095 18,105 20,895 0.1 (1.4) (2.6)
Adj PAT (excl. RPS impact) 16,073 18,542 20,869 16,064 18,797 21,406 0.1 (1.4) (2.5)
EPS (Rs) 15.7 18.6 21.2 15.7 18.8 21.8 0.1 (1.4) (2.6)
Adj EPS (Rs) (excl. RPS impact) 16.7 19.3 21.7 16.7 19.6 22.3 0.1 (1.4) (2.5)
Key assumptions
Ad revenue growth (%) (a) 18.7 16.0 15.0 18.0 15.5 14.5
Domestic subscription grow th (%) (a) 15.0 13.5 14.0 14.5 15.0 15.0
International subscription grow th (%) (a) — — — (2.0) — —
Core business EBITDA margin 36.9 36.8 36.3 34.8 34.7 34.7
EBITDA margin (%) 32.6 32.1 31.7 31.1 31.8 31.8
EBITDA loss in digital (Rs mn) 2,860 3,232 3,205 2,500 1,800 1,800

Exhibit 11 : Zee: Dividend-discount model based fair PE derivation
Revised Earlier
Base y ear EPS (Rs/share) 100 100 100 100 Expect deflationary pressure on satellite (TV ) rights of mov ies as OTT gains
High-grow th phase
Terminal grow th- TG (%) 4.0 4.0 5.5 5.3 We low er terminal grow th rate and marginally increase WACC (same as Ke
Fair PE (X) 19.0 16.0 28.0 24.0
Exhibit 12: Zee: Dividend-discount model based fair PE derivation under different scenarios
Payout ratio (%) HGP (years) HGP-Growth (%) TG (%) WACC (%) PE (X)
70 7 10.0 4.0 12.0 13.3
70 7 11.0 4.0 12.0 14.0
70 7 12.0 4.0 12.0 14.7
Bear case
70 7 13.0 4.0 12.0 15.5

75 7 10.0 4.0 11.5 15.2
75 7 11.0 4.0 11.5 16.0
75 7 12.0 4.0 11.5 16.8
75 7 13.0 4.0 11.5 17.7
75 10 10.0 4.0 12.0 15.7
75 10 11.0 4.0 12.0 16.8
75 10 12.0 4.0 12.0 18.0
Base case
75 10 13.0 4.0 12.0 19.3

80 10 10.0 4.0 11.5 17.9
80 10 11.0 4.0 11.5 19.2
80 10 12.0 4.0 11.5 20.6
80 10 13.0 4.0 11.5 22.1
65 15 11.0 5.0 11.5 19.9
65 15 12.0 5.0 11.5 22.0
65 15 13.0 5.0 11.5 24.3
Bull case
65 15 14.0 5.0 11.5 27.0

65 15 11.0 5.5 11.5 20.7
65 15 12.0 5.5 11.5 23.0
65 15 13.0 5.5 11.5 25.5
65 15 14.0 5.5 11.5 28.3

Exhibit 13: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2014-21E (Rs mn)
2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)
Total revenues 44,217 48,837 58,514 64,332 66,857 77,660 88,820 101,209
EBITDA 12,033 12,538 15,094 19,260 20,761 25,323 28,539 32,088
Other income 1,807 2,278 2,016 2,240 2,795 2,214 2,563 2,785
Interest (158) (103) (123) (161) (1,448) (100) (50) (50)
Depreciation (501) (673) (840) (1,152) (1,821) (2,363) (2,513) (2,704)
Pretax profits 13,181 14,040 16,147 20,187 20,287 25,074 28,539 32,120
Extraordinary items — — (331) 12,234 2,955 — — —
Taxes (4,291) (4,284) (5,528) (6,805) (8,409) (9,027) (9,989) (11,242)
Minority interest 21 20 (22) 5 25 25 25 25
RPS div idends (incl tax) (101) (1,453) (1,457) (1,211) 0 (969) (727) (545)
PAT 8,810 8,323 8,810 22,205 14,791 15,104 17,849 20,358
Adj PAT (pre-exceptional; excl RPS impact) 8,911 9,776 10,482 13,386 14,428 16,073 18,542 20,869
EPS (Rs) 9.2 8.7 9.2 23.1 15.4 15.7 18.6 21.2
Adj EPS (Rs) - (excl RPS impact) 9.3 10.2 10.9 13.9 15.0 16.7 19.3 21.7
Balance sheet (Rs mn)

Total Equity 27,207 35,306 42,145 66,567 75,617 85,518 97,007 109,270
Preference capital 20,169 20,192 20,169 0 0 0 0 0
Minority interest 61 4 85 10 141 141 141 141
Total borrow ings 29 12 9 19,088 15,254 11,441 7,627 3,814
Currrent liabilities 12,850 14,544 16,532 14,702 20,284 21,678 24,886 28,452
Total capital 47,467 55,514 62,408 85,665 91,012 97,099 104,775 113,225
Cash and cash eq 16,500 20,476 21,346 40,935 33,264 33,822 36,793 40,932
Inv entories 11,736 11,878 13,160 16,843 26,278 29,278 33,278 37,278
Receiv ables 10,281 10,692 13,245 13,059 15,365 17,021 19,467 22,183
Loans and adv ances 7,645 11,627 12,972 14,156 13,114 14,994 16,723 18,265
Other current assets 1,243 1,706 2,127 3,429 7,026 7,326 7,726 8,126
Net fixed assets 11,730 12,254 14,960 9,721 14,125 14,212 13,549 12,446
Inv estments 884 894 576 1,321 2,124 2,124 2,124 2,124
Deferred tax assets 298 531 556 903 0 0 0 0
Total assets 47,467 55,514 62,408 85,665 91,012 97,099 104,775 113,225
Free cash flow (Rs mn)

Operating cash flow , excl. W-cap, ex-taxes 12,976 13,209 15,713 19,170 22,390 25,642 28,564 32,113
Working capital (4,904) (2,236) (2,632) (5,670) (8,551) (5,442) (5,367) (5,091)
Taxes paid (4,242) (4,164) (5,827) (6,810) (8,295) (9,027) (9,989) (11,242)
Capital expenditure (1,482) (1,147) (4,064) (2,768) (4,605) (2,450) (1,850) (1,600)
Other income (net) 1,108 1,126 1,003 1,001 1,107 2,114 2,513 2,735
Free cash flow (prior to RPS dividends) 3,456 6,788 4,193 4,923 2,046 10,838 13,871 16,915
RPS div idends (101) (1,453) (1,457) (1,211) - (969) (727) (545)
Free cash flow to equity holders 3,355 5,335 2,736 3,712 2,046 9,870 13,144 16,370
Key assumptions / metrics

Ad rev enue grow th (%) 21.2 11.8 28.9 9.2 14.5 18.7 16.0 15.0
Domestic subscription rev enue grow th (%) 13.2 8.0 14.5 11.7 11.8 15.0 13.5 14.0
Ov erseas subscription rev enue grow th (%) 5.5 (23.6) 15.7 3.0 (2.8) - - -
Content cost as % of rev enue 37.7 38.6 41.2 42.2 40.9 35.3 35.8 37.6
Effectiv e tax rate (%) 32.6 30.5 34.2 33.7 41.5 36.0 35.0 35.0
EBITDA margin (%) 27.2 25.7 25.8 29.9 31.1 32.6 32.1 31.7
ROAE 26.6 26.6 22.7 40.9 20.8 18.7 19.6 19.7
ROACE 24.9 21.8 21.6 20.5 15.7 20.1 21.8 23.2

REDUCE
Sun TV Network (SUNTV)
Media OCTOBER 11, 2018
UPDATE
Coverage view: Attractive
Priorities not cognizant of changing landscape. Sun’s viewership share loss in Tamil Price (`): 644
GEC could result in continued underperformance versus industry. Further, its strategy of Target price (`): 660
expanding its TV network in new regional markets and its lack of focus/underinvestment
BSE-30: 34,761
in OTT could have ramifications in the event of accelerated ‘TV-to-OTT’ shift. We cut
FY2020-21E earnings by 4% and target multiple to 17X Sep-20E earnings from 24X;
we have lowered multiples of broadcasters in view of potential risks from digital. Stay
cautious despite a sharp correction in the stock price; our revised TP is `660 (`925).
Company dat a and v aluat ion summary
Sun TV Netw ork
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-w eek range (Rs) (high,low ) 1,098-557 EPS (Rs) 34.7 37.0 40.8
Market Cap. (Rs bn) 253.6 EPS grow th (%) 20.6 6.6 10.3
Shareholding pattern (%) P/E (X) 18.5 17.4 15.8
Promoters 75.0 Sales (Rs bn) 37.4 42.0 47.2
FIIs 12.1 Net profits (Rs bn) 13.7 14.6 16.1
MFs 4.7 EBITDA (Rs bn) 19.5 20.8 23.6
Price performance (%) 1M 3M 12M EV /EBITDA (X) 12.4 11.5 10.0
Absolute (6.9) (20.5) (21.3) ROE (%) 28.4 27.9 28.6
Rel. to BSE-30 1.6 (17.1) (27.7) Div. Yield (%) 3.1 3.5 3.9
Sun should prioritize digital over regional expansion
The penetration of TV and internet in Southern states is higher compared to the rest of India
(HSM) (Exhibits 1-4). This potentially implies (1) lower TV penetration-led opportunity and
(2) faster adoption of OTT, in South. Yet, Sun’s focus and investments in digital are
underwhelming and its OTT platform, Sun NXT (launched in June 2017), lags peers on key
metrics (Exhibit 5). It looks like the company is somewhat oblivious of risks/opportunities that
OTT present. On the other hand, Sun is eyeing regional expansion in TV (not opportune time in
our view) and it plans to launch a Bangla GEC by end-FY2019. This initiative would incur an
investment of `1.25-1.5 bn/year and take at least 3-4 years to break even. We believe it is
about time Sun steps up investments in digital and prioritize it over regional expansion, if
necessary.
TN—corrective measures underway for viewership share defense; would wait and watch
Sun TV’s viewership share in the Tamil GEC genre has dropped to 46-47% from 65% over the
past two years (Exhibits 7-8). Share loss to competition is attributable to (1) Sun’s reluctance to
experiment with contemporary/bold content on Sun TV, (2) lack of second GEC to cater to
urban/youth audience and (3) perhaps, dismissive view about competition. As a corrective
measure, Sun is about to re-launch Sun Life as the second GEC with programming focused on
urban/youth audience that Sun TV has lost to its competition. We are not expecting any
fireworks from Sun Life as we believe investments may be modest/suboptimal in the near term.
However, we would keep an eye on its launch and subsequent progress.
Stay cautious notwithstanding sharp correction in the stock price
We tweak our earnings to incorporate (1) higher content investments, (2) lower ad growth in
view of share loss, (3) higher-than-estimated revenue and EBIT from IPL, (4) marginal delays in
Jaykumar Doshi
digitization in TN and (5) promoter compensation cap (at FY2018-level of `1.75 bn). Net jaykumar.doshi@kotak.com
result—4% earnings cut for FY2020-21E. We lower our target PE multiple to 16X September Mumbai: +91-22-4336-0882
2020E earnings from 24X as we ascribe lower value to the broadcasting business in view of
potential risks from digital. Despite Sun NXT’s weak positioning and lack of strategy, we ascribe
1X P/E multiple to factor optionality of digital in view of content library. We maintain our
cautious stance with a revised TP of `660 (`925 earlier).

Mumbai: +91-22-4336-0000
Media Sun TV Network
What Sun needs to do?

Sun scores low on our 10-point framework for success in digital
As discussed in the industry section, three key attributes of success in digital are (1) content
capabilities, (2) product and technology and (3) capital. Sun scores moderately on #1 and
low on #2 and #3. Why moderately on content capabilities? Sun has unparalleled content
and movie library in the South; however, its content capabilities are largely attributable to its
private (third-party) content producers. While most of these producers have exclusively
worked for Sun TV Network so far, the same may not hold in the OTT universe. In-house
content capabilities and team strength of Sun are not at par with those of national
broadcasters such as Star and Zee.
Partnership with other broadcasters should be the way forward, in our view
Sun’s historical strength in the TV broadcasting business was largely due to distribution
strength and exclusive working relationships with good private content producers. These
two advantages would not continue in the OTT universe. In our view, Sun is lagging Zee and
Star by 1-3 years in its digital transition journey. And it does not have any inherent
advantages (such as technological-edge or deep pockets) to compete against the
heavyweights.
In our view, it does not make sense for Sun NXT to be a ‘me-too’ OTT. The best way
forward for Sun is to form Hulu-like partnership with other large broadcasters such
as Star and Zee.
Exhibit 1: TV penetration is already very high in South; we Exhibit 2: An average TV viewer in South spends about 20%
expect muted growth ahead more time on TV than his counterpart in HSM
TV households and penetration, July 2018 Average time spent on TV per TV viewer (mins/day), July 2018
TV households (LHS, mn) TV penetration (RHS, %) 260 India South Rest of India (HSM)
250 100
95 249
250
200 80
240
66
150 60 230
57 224
220
100 197 40
211
128 210
50 20
68 200
0 0
India South Rest of India 190
(HSM) India South Rest of India (HSM)
Source: BARC India, Kotak Institutional Equities Source: BARC India, Kotak Institutional Equities

Sun TV Network Media
Exhibit 3: Internet penetration is higher in South; TV-to-OTT Exhibit 4: Within South, internet penetration in highest in TN,
shift could be faster than HSM Sun's core market
Internet subscribers and penetration, March 2018 Internet subscribers and penetration, March 2018
Internet subscribers (LHS, mn) Internet subscribers (LHS, mn)

600 Internet penetration (RHS, %) 60 60 Internet penetration (RHS, %) 60
55 55
500 50 50 51 50
49
42
400 40 40 40
38
35
300 30 30 30
494
200 20
365 20 40 38 20
32
100 10
129 10 20 10
0 0
India South Rest of India 0 0
(HSM) Tamil Nadu Kerala Karnataka AP/Telangana
Source: TRAI, Kotak Institutional Equities Source: TRAI, Kotak Institutional Equities
Exhibit 5: Sun NXT is significantly behind peers of MAUs and DAUs

Key metrics of OTT players in India, Aug 2018

Youtube 220-240 170-190 50-60
F acebook 200-220 140-160 30-40
Hotstar (a) 75-100 14-18 35-40
J ioTV Liv e 40-50 8-10 25-30
Prime V ideo 25-35 5-7 40-45
Netflix 10-15 4-5 40-45
V oot 30-40 4-6 35-40
Airtel TV 15-20 5-7 25-30
ZEE5 41 NA 31
SONY LIV 20-30 3-5 20-25
J ioCinema 8-15 2-3 25-30
Sun NXT 2-5 0-0.5 35-40
Notes:

Exhibit 6: Sun scores low on our 10-point framework to assess strengths of OTT players

Content
Others
Notes:
(1) We have not covered a few OTT players such as Eros Now, Alt Balaji, Airtel TV, Vodafone play.

Exhibit 7: Regional genres - BARC ratings market share, 2-Apr-16 to 21-Sep-18 (Week 14, 2016 to Week 38, 2018) (%)
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19
Tamil GEC (Urban + Rural)- Viewership share in the top 6 channels (%)
Sun TV 65.7 61.5 62.3 61.7 57.5 50.5 52.8 50.7 46.8 45.8
STAR Vijay 12.2 12.9 10.7 12.6 16.9 24.6 21.9 20.5 21.4 22.2
Zee Tamil 8.4 12.4 14.0 13.4 13.6 14.3 15.6 18.1 20.1 21.5
Polimer 5.5 4.9 4.5 4.7 4.8 3.8 3.7 3.3 3.1 2.6
Kalaignar TV 4.6 3.6 3.5 3.3 3.1 2.9 3.5 3.4 2.5 2.3
Jaya TV 3.6 4.7 5.0 4.2 4.0 3.9 2.5 2.4 2.2 2.4
Colors Tamil 1.5 3.8 3.2
Total of top 7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Telugu GEC (Urban + Rural)- Viewership share in the top 4 channels (%)
Zee Telugu 27.9 24.5 22.8 24.0 24.3 22.9 24.6 24.0 26.8 25.1
Star Maa TV 24.4 22.1 22.5 23.0 22.2 27.7 24.5 25.7 27.8 30.0
Gemini TV (Sun) 21.8 28.3 30.1 29.3 29.4 25.6 24.4 24.8 22.4 22.0
ETV Telugu 25.9 25.1 24.6 23.7 24.1 23.8 26.4 25.6 23.0 22.8
Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Kannada GEC (Urban + Rural)- Viewership share in the top 5 channels (%)
Colors Kannada 35.5 36.2 35.2 34.2 34.4 35.0 34.8 35.0 33.9 33.1
Colors Super 0.0 2.8 4.5 6.5 8.0 8.4 11.4 10.3 8.0 9.0
Zee Kannada 23.4 22.4 24.5 24.8 25.6 24.5 22.3 24.7 25.0 29.3
Udaya TV (Sun) 20.2 18.8 12.8 13.0 13.6 16.4 18.7 18.0 18.8 17.3
Star Suvarna 20.9 19.8 23.0 21.6 18.3 15.6 12.8 12.0 14.4 11.3
Total of Top 5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Malayalam GEC (Urban + Rural)- Viewership share in the top 4 channels (%)
Star Asianet 57.2 52.9 55.3 56.8 54.9 51.9 43.7 48.1 52.8 52.6
Surya TV (Sun) 12.3 17.4 15.5 14.5 15.5 20.1 20.3 18.4 16.6 17.0
Mazhavil Manorama 18.7 16.8 15.5 15.7 18.2 16.7 21.3 16.9 15.5 15.8
Flowers TV 11.8 12.8 13.7 12.9 11.4 11.3 14.8 16.6 15.1 14.6
Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Telugu movie channels (Urban + Rural)- Viewership share in the top 4 channels (%)
Gemini movies (Sun) 48.3 47.0 42.2 41.0 35.6 32.2 31.9 33.1 28.4 32.1
Zee Cinemalu 0.0 3.3 14.2 17.2 18.9 21.7 21.8 23.1 26.0 24.7
Star MAA movies 35.3 32.3 26.2 25.3 29.2 32.4 30.2 28.3 31.8 27.5
ETV cinema 16.4 17.4 17.4 16.6 16.2 13.6 16.1 15.5 13.7 15.7
Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Malayalam movie channels (Urban + Rural)- Viewership share in the top 2 channels (%)
Star Asianet movies 54.0 51.1 56.1 51.0 49.2 51.3 50.4 55.3 53.9 54.6
Surya movies (Sun) 46.0 48.9 43.9 49.0 50.8 48.7 49.6 44.7 46.1 45.4
Total of Top 2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Tamil movie channel (Urban + Rural)- (GVMs)

KTV (Sun) 273 265 278 268 316 332 337 294 275 303
Kannada movie channel (Urban + Rural)- (GVMs)

Udaya movies (Sun) 172 156 151 170 190 193 186 191 185 220
Source: BARC data,, Kotak Institutional Equities

Exhibit 8: Weighted viewership share of Sun network in regional GECs
Sun's weighted viewership share in South regional GECs (%)

42
39.7 39.8
40 39.2
38.6
38 37.0
35.5
36
34.3 34.2
34
31.8
32 31.0
30
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E
Notes:
(1) Above market share working is based on Sun network's quarterly viewership share in regional GECs (South) and it
uses ad market size of respective regional GE genre as weight.
(2) The above calculation does not cover regional movies, regional music, regional news, regional comedy and
regional kids genres that collectively account for about 30-35% of Sun's ad revenues. It only covers four regional
GECs of Sun (Sun TV, Gemini TV, Udaya TV and Surya TV) that account for 65-70% of Sun’s ad revenues.
Source: BARC data, Kotak Institutional Equities estimates
Exhibit 9: Revised earnings estimates of Sun TV Network, FY2019E-21E (Rs mn)
Revised Previous Change (%)

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E
Advertising revenues (incl. slot sale) 15,430 17,132 19,081 15,745 17,699 20,037 (2) (3) (5)
Domestic subscription revenues 13,505 16,422 19,229 13,690 16,966 20,001 (1) (3) (4)
- DTH subscription revenues 9,015 10,971 12,633 9,015 11,053 12,727 0 (1) (1)
- Cable subscription revenues 4,490 5,451 6,596 4,676 5,913 7,273 (4) (8) (9)
Overseas subscription revenues 1,736 1,771 1,771 1,745 1,780 1,815 (0) (0) (2)
Radio revenues 1,128 1,319 1,517 1,148 1,320 1,518 (2) (0) (0)
Sun Pictures (movie production) 1,500 1,500 1,500 1,500 1,500 1,500 0 0 0
Other operating revenues (incl IPL) 4,109 3,833 4,116 2,950 3,179 3,358 39 21 23
Total revenues 35,909 40,478 45,714 35,277 40,943 46,729 2 (1) (2)
Direct expenses 4,210 6,129 7,032 3,957 5,369 6,032 6 14 17
Movie production costs 1,500 1,500 1,500 1,500 1,500 1,500
Employee expenses 3,554 3,915 4,240 3,743 4,304 4,950 (5) (9) (14)
SG&A expenses 4,154 4,539 4,962 3,488 3,896 4,251 19 17 17
D&A expenses (incl movie amortization) 5,345 6,046 6,876 5,595 6,396 7,271 (4) (5) (5)
Total expenditure 18,764 22,130 24,610 18,283 21,465 24,004 3 3 3
EBIT 17,145 18,348 21,103 16,994 19,478 22,725 1 (6) (7)
EBIT margin (%) 47.7 45.3 46.2 48.2 47.6 48.6
PAT 13,690 14,588 16,092 13,702 15,189 16,816 (0) (4) (4)
EPS (Rs/share) 34.7 37.0 40.8 34.8 38.5 42.7 (0) (4) (4)
Key assumptions
Ad revenue (incl slot sale) growth (%) 10.6 11.0 11.4 12.9 12.4 13.2
Domestic subs revenue growth (%) 20.5 21.6 17.1 22.1 23.9 17.9
- DTH subscription revenue growth (%) 22.1 21.7 15.2 22.1 22.6 15.2
- Cable subscription revenue growth (%) 17.2 21.4 21.0 22.1 26.5 23.0
Overseas subscription revenue growth (%) 2.5 2.0 - 3.0 2.0 2.0
Radio revenue growth (%) 13.0 17.0 15.0 15.0 15.0 15.0
Movies amortization expense 4,533 5,143 5,898 4,783 5,493 6,293 (5) (6) (6)
IPL operating profit / (loss) 1,993 1,519 1,522 1,215 1,193 1,196 64 27 27

Exhibit 10: Sun: Dividend-discount model based fair PE derivation
Revised Earlier
Base y ear EPS (Rs/share) 100.0 100.0 100.0 100.0 Expect deflationary pressure on satellite (TV ) rights of mov ies as OTT gains
Hi-grow th phase
Terminal grow th (%) 4.0 4.0 5.5 5.3 We low er terminal grow th rate and marginally increase WACC (same as Ke
Fair PE (X) 19.0 16.0 28.0 24.0
Exhibit 11: Sun: Dividend-discount model based fair PE derivation under different scenarios
Payout ratio (%) HGP (years) HGP-Gr (%) TG (%) WACC (%) PE (X)
90 7 6.0 4.0 12.5 13.2
90 7 7.0 4.0 12.5 13.8
90 7 8.0 4.0 12.5 14.5
Bear case
90 7 9.0 4.0 12.5 15.3

95 7 6.0 4.0 12.0 14.7
95 7 7.0 4.0 12.0 15.5
95 7 8.0 4.0 12.0 16.3
95 7 9.0 4.0 12.0 17.1
90 10 7.0 4.0 12.5 14.5
90 10 8.0 4.0 12.5 15.5
90 10 9.0 4.0 12.5 16.5
Base case
90 10 10.0 4.0 12.5 17.7

95 10 7.0 4.0 12.0 16.2
95 10 8.0 4.0 12.0 17.4
95 10 9.0 4.0 12.0 18.6
95 10 10.0 4.0 12.0 19.9
90 15 8.0 5.0 12.0 18.9
90 15 9.0 5.0 12.0 20.8
90 15 10.0 5.0 12.0 22.9
Bull case
90 15 11.0 5.0 12.0 25.3

95 15 8.0 5.5 12.0 20.7
95 15 9.0 5.5 12.0 22.8
95 15 10.0 5.5 12.0 25.1
95 15 11.0 5.5 12.0 27.7

Exhibit 12: Consolidated financial summary of Sun TV Network, FY2013-21E (Rs mn)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)
Net sales 19,230 22,236 23,954 25,698 26,457 29,630 37,409 41,978 47,214
EBIT 9,674 10,314 10,619 12,693 13,694 15,538 18,645 19,848 22,603
Other income 722 866 989 1,106 1,538 1,423 1,744 1,814 1,987
Interest (expense)/income (49) (46) (23) (22) (10) (11) (11) (11) (11)
Pretax profits 10,347 11,134 11,586 13,777 15,222 16,950 20,378 21,651 24,579
Tax-cash (3,359) (3,730) (3,760) (4,755) (5,203) (5,822) (6,950) (7,369) (8,846)
Tax-deferred 53 48 — — — — — — —
Minority interest 54 28 (6) (68) 288 228 262 306 358
Net profits after minority interests 7,096 7,480 7,820 9,015 10,307 11,355 13,690 14,588 16,092
Earnings per share (Rs) 18.0 19.0 19.8 22.9 26.2 28.8 34.7 37.0 40.8
Balance sheet (Rs mn)
Total equity 27,854 30,954 33,481 35,263 40,285 46,121 50,322 54,234 58,464
Deferred Tax 284 260 226 176 521 763 763 763 763
Total borrowings — — — — — — — — —
Currrent liabilities 3,006 3,082 2,262 2,765 2,941 5,832 6,855 7,838 8,794
Total capital 32,396 35,636 37,450 40,894 43,782 52,756 57,979 62,874 68,060
Cash 4,162 6,094 7,866 10,931 7,884 12,771 12,318 14,608 16,861
Current assets 12,000 11,075 12,716 14,950 11,519 15,632 20,341 22,151 24,802
Total fixed assets 8,564 7,976 7,330 4,544 7,841 7,763 7,701 7,798 7,723
Intangible assets 5,233 5,775 4,481 4,551 4,421 4,246 5,012 5,404 5,404
Total assets 32,396 35,636 37,450 40,894 39,706 48,453 53,414 58,002 62,830
Free cash flow (Rs mn)
Operating cash flow, excl. WC 10,325 12,358 13,034 13,300 12,794 14,216 17,039 18,525 20,634
Working capital (WC) (1,926) (710) (1,519) (254) (293) (1,221) (3,687) (827) (1,695)
Capital expenditure (4,037) (4,305) (4,400) (3,735) (5,324) (4,353) (6,050) (6,535) (7,103)
Other income 403 773 823 938 1,089 1,423 1,744 1,814 1,987
Free cash flow 4,765 8,116 7,938 10,249 8,267 10,065 9,047 12,976 13,823
Ratios (%)
Debt/equity — — — — — — — — —
Net debt/equity (15) (20) (23) (31) (20) (28) (24) (27) (29)
RoAE 26 25 24 26 27 26 28 28 28
RoACE 27 25 24 26 26 25 27 27 28
Ratios (%)
Ad revenue (incl slot sale) growth (%) 7.6 0.1 4.8 5.6 (3.7) 9.7 10.6 11.0 11.4
Domestic subs revenue growth (%) 3.2 25.9 14.5 10.5 15.7 18.9 20.5 21.6 17.1
- DTH subscription revenue growth (%) 12.0 20.2 17.3 11.3 12.2 12.3 22.1 21.7 15.2
- Cable subscription revenue growth (%) (14.7) 41.2 8.1 8.3 24.6 33.9 17.2 21.4 21.0
Overseas subscription revenue growth (%) 22.3 21.2 8.8 5.5 7.4 7.1 3.0 2.0 2.0
Radio revenue growth (%) 25.9 20.4 20.2 11.2 (47.7) 12.0 13.0 17.0 15.0
Movies amortization expense 3,202 3,827 5,261 4,292 3,442 3,778 4,533 5,143 5,898
IPL operating profit / (loss) — (308) (583) (566) (318) (227) 1,993 1,519 1,522

Disclosures
"I, Jaykumar Doshi, hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
50%
provided investment banking services within the
previous 12 months.
40% * The above categories are defined as follows: Buy = We
31.3% expect this stock to deliver more than 15% returns over
30% the next 12 months; Add = We expect this stock to
25.4%
deliver 5-15% returns over the next 12 months; Reduce
21.4% 21.9%
= We expect this stock to deliver -5-+5% returns over
20% the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. O ur
10% target prices are also on a 12-month horizon basis.
5.0% 4.5%
2.0% These ratings are used illustratively to comply with
0.5%
applicable regulations. As of 31/03/2018 Kotak
0%
Institutional Equities Investment Research had
BUY ADD REDUCE SELL
investment ratings on 207 equity securities.
Source: Kotak Institutional Equities As of June 30, 2018
Ratings and other definitions/identifiers

Definitions of rating
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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ATTRACTIVE

Competition intense: Indian OTT’s ‘e-com’ moment

Zee: Odds mount. Downgrade to REDUCE and cut TP to `430

Kotak Institutional Equities Research

OTT: Executive Summary of FAQs

We expect the convergence of screens from a consumer and advertiser standpoint. We do

It is difficult to call out winners or to predict if it will be a ‘winner-takes-most’ market. Three

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

#4: Impact on profitability

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Population: 1.3 bn Population: 1.37 bn

Households (HHs): 298 mn Households (HHs): 329 mn

Urban HHs: 110 mn Urban HHs: 135 mn

Rural HHs: 188 mn Rural HHs: 194 mn

Internet users: 494 mn Internet users: 887 mn

Internet penetration: 38% Internet penetration: 65%

Smartphone users: 291 mn Smartphone users: 678 mn

Smartphone users: 23% Smartphone penetration: 50%

Unique 3G/4G subs: 315 mn Unique 3G/4G subs: 698 mn

3G/4G penetration: 24% 3G/4G penetration: 51%

Wireline subs: 21.1 mn Wireline subs: 48 mn

Key players: Zee, Star, TV18, TV watch time: 160 bn mins/day

Total watch time: 7 bn mins/day Total watch time: 53 bn mins/day

Pay-TV subscription : US$4.9 bn Pay-TV subscription: US$7.5

O TT ad revenue: US$0.4 bn O TT ad revenue: US$2.2 bn

O TT's share in ad spends: 4% O TT's share in ad spends: 13%

Source: BARC, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

#1: Size of OTT opportunity: US$3.1 bn by FY2023E at a CAGR of 48% on low

Exhibit 2: We estimate 48% CAGR in OTT revenues to US$3.1 bn over FY2018-23E

Source: Kotak Institutional Equities estimates

A burgeoning digital ecosystem is revolutionising media consumption trends

 Smartphone users— up to 350 mn from 215 mn; smartphone penetration at 28% of

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Internet users (LHS, mn) Smartphone users (LHS, mn)

Mobile data cost (Rs/GB) Mobile data usage (bn MB/quarter)

Source: Kotak Institutional Equities Source: Companies, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

We expect 52% CAGR in digital video consumption over FY2018-23E.

Digital video advertising growth will follow consumption

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

OTT subscription opportunity may be relatively small in the initial years

Exhibit 9: New consumer classification system (NCCS)

Education of Chief Wage Earner in a household

Source: MRUC, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Urban 1mn+ | NCCS A, Urban 1mn+ | NCCS B,

Rural | NCCS D/E, 22 , Rural | NCCS B, 30 ,

Source: BARC, Kotak Institutional Equities

Paid subscriptions likely to grow to about 67 mn in FY2023E from 16 mn in FY2018

(2) 3.8% CAGR in Urban NCCS C households to 32 mn over FY2018-23E.

Based on the above assumptions, we arrive at 56 mn subscribers and ARPU of `95 in

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

YouTube and Facebook are strong players

Source: Company, Kotak Institutional Equities estimates

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 13: Video consumption forecast, March fiscal year-ends, 2018-28E

2018 2019E 2020E 2021E 2022E 2023E 2028E

Digital video consumption forecast

Digital v ideo consumption (mins/day per 3G/4G subscribers) 18 31 39 47 55 63 90

Total digital video consumption (bn mins per day) 7 14 22 30 41 53 114

Growth metrics (yoy %)

Source: BARC, Kotak Institutional Equities estimates